A Sliding Share Price Has Us Looking At Stockwik Förvaltning AB (publ)'s (STO:STWK) P/E Ratio
Stockwik Förvaltning (STO:STWK) shares have retraced a considerable 33% in the last month. But plenty of shareholders will still be smiling, given that the stock is up 9.3% over the last quarter. If we look back over the last year, the stock has gained 99% which is great, even in a bull market.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
View our latest analysis for Stockwik Förvaltning
How Does Stockwik Förvaltning's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 5.46 that sentiment around Stockwik Förvaltning isn't particularly high. The image below shows that Stockwik Förvaltning has a lower P/E than the average (17.3) P/E for companies in the capital markets industry.
Its relatively low P/E ratio indicates that Stockwik Förvaltning shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Stockwik Förvaltning, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Stockwik Förvaltning increased earnings per share by a whopping 37% last year.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Stockwik Förvaltning's P/E?
Stockwik Förvaltning's net debt is considerable, at 105% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Stockwik Förvaltning's P/E Ratio
Stockwik Förvaltning's P/E is 5.5 which is below average (14.8) in the SE market. The company may have significant debt, but EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Given Stockwik Förvaltning's P/E ratio has declined from 8.2 to 5.5 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Stockwik Förvaltning. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
