What Is ZoomerMedia's (CVE:ZUM) P/E Ratio After Its Share Price Rocketed?
It's great to see ZoomerMedia (CVE:ZUM) shareholders have their patience rewarded with a 33% share price pop in the last month. But that gain wasn't enough to make shareholders whole, as the share price is still down 7.7% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock 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.
See our latest analysis for ZoomerMedia
Does ZoomerMedia Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 16.49 that there is some investor optimism about ZoomerMedia. You can see in the image below that the average P/E (12.5) for companies in the media industry is lower than ZoomerMedia's P/E.
ZoomerMedia's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. 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. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
In the last year, ZoomerMedia grew EPS like Taylor Swift grew her fan base back in 2010; the 296% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 77% per year. With that kind of growth rate we would generally expect a high P/E ratio. Regrettably, the longer term performance is poor, with EPS down -77% per year over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.
ZoomerMedia's Balance Sheet
ZoomerMedia has net cash of CA$15m. This is fairly high at 38% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On ZoomerMedia's P/E Ratio
ZoomerMedia trades on a P/E ratio of 16.5, which is above its market average of 13.1. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect ZoomerMedia to have a high P/E ratio. What is very clear is that the market has become more optimistic about ZoomerMedia over the last month, with the P/E ratio rising from 12.4 back then to 16.5 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than ZoomerMedia. 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).
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
