Unfortunately for some shareholders, the MGI Digital Technology Société Anonyme (EPA:ALMDG) share price has dived 30% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 22% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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 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.
Does MGI Digital Technology Société Anonyme Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 16.19 that sentiment around MGI Digital Technology Société Anonyme isn’t particularly high. The image below shows that MGI Digital Technology Société Anonyme has a lower P/E than the average (28.1) P/E for companies in the tech industry.
This suggests that market participants think MGI Digital Technology Société Anonyme will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that MGI Digital Technology Société Anonyme grew EPS by a stonking 41% in the last year. And it has bolstered its earnings per share by 15% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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 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 MGI Digital Technology Société Anonyme’s Balance Sheet Tell Us?
MGI Digital Technology Société Anonyme has net cash of €17m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On MGI Digital Technology Société Anonyme’s P/E Ratio
MGI Digital Technology Société Anonyme’s P/E is 16.2 which is above average (13.2) in its market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect MGI Digital Technology Société Anonyme to have a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about MGI Digital Technology Société Anonyme over the last month, with the P/E ratio falling from 23.2 back then to 16.2 today. 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 have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: MGI Digital Technology Société Anonyme 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 email@example.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.
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