A Sliding Share Price Has Us Looking At Torslanda Property Investment AB (publ)'s (STO:TORSAB) P/E Ratio

To the annoyance of some shareholders, Torslanda Property Investment (STO:TORSAB) shares are down a considerable 31% in the last month. The recent drop has obliterated the annual return, with the share price now down 8.1% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for Torslanda Property Investment

How Does Torslanda Property Investment's P/E Ratio Compare To Its Peers?

Torslanda Property Investment's P/E is 8.17. You can see in the image below that the average P/E (7.7) for companies in the real estate industry is roughly the same as Torslanda Property Investment's P/E.

Its P/E ratio suggests that Torslanda Property Investment shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Torslanda Property Investment actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Torslanda Property Investment's earnings made like a rocket, taking off 78% last year. And earnings per share have improved by 22% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Torslanda Property Investment's Balance Sheet Tell Us?

Torslanda Property Investment's net debt is considerable, at 170% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On Torslanda Property Investment's P/E Ratio

Torslanda Property Investment's P/E is 8.2 which is below average (14.1) in the SE market. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What can be absolutely certain is that the market has become more pessimistic about Torslanda Property Investment over the last month, with the P/E ratio falling from 11.9 back then to 8.2 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Torslanda Property Investment may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.