A Sliding Share Price Has Us Looking At Vicon Holdings Limited's (HKG:3878) P/E Ratio

Unfortunately for some shareholders, the Vicon Holdings (HKG:3878) share price has dived 83% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 57% drop over twelve months.

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. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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 Vicon Holdings

How Does Vicon Holdings's P/E Ratio Compare To Its Peers?

Vicon Holdings's P/E of 11.25 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (8.0) for companies in the construction industry is lower than Vicon Holdings's P/E.

That means that the market expects Vicon Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Vicon Holdings had pretty flat EPS growth in the last year. And over the longer term (3 years) earnings per share have decreased 10% annually. So you wouldn't expect a very high P/E.

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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 Vicon Holdings's Balance Sheet Tell Us?

Net debt is 29% of Vicon Holdings's market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Vicon Holdings's P/E Ratio

Vicon Holdings trades on a P/E ratio of 11.3, which is above its market average of 9.0. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future. Given Vicon Holdings's P/E ratio has declined from 67.4 to 11.3 in the last month, we know for sure that the market is significantly less confident 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 a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Vicon Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.