To the annoyance of some shareholders, MGI Digital Technology Société Anonyme (EPA:ALMDG) shares are down a considerable 42% in the last month. Even longer term holders have taken a real hit with the stock declining 24% 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). 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for MGI Digital Technology Société Anonyme
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 14.75 that sentiment around MGI Digital Technology Société Anonyme isn’t particularly high. If you look at the image below, you can see MGI Digital Technology Société Anonyme has a lower P/E than the average (22.8) in the tech industry classification.
This suggests that market participants think MGI Digital Technology Société Anonyme will underperform other companies in its industry. Since the market seems unimpressed with MGI Digital Technology Société Anonyme, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Notably, MGI Digital Technology Société Anonyme grew EPS by a whopping 41% in the last year. And its annual EPS growth rate over 5 years is 15%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does MGI Digital Technology Société Anonyme’s Debt Impact Its P/E Ratio?
Since MGI Digital Technology Société Anonyme holds net cash of €17m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On MGI Digital Technology Société Anonyme’s P/E Ratio
MGI Digital Technology Société Anonyme’s P/E is 14.8 which is above average (12.8) in its market. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we’d expect MGI Digital Technology Société Anonyme to have a high P/E ratio. Given MGI Digital Technology Société Anonyme’s P/E ratio has declined from 25.6 to 14.8 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 don’t like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.