LleidaNetworks Serveis Telemàtics (BME:LLN) shares have continued recent momentum with a 62% gain in the last month alone. Zooming out, the annual gain of 199% knocks our socks off.
Assuming no other changes, a sharply higher share price makes a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Check out our latest analysis for LleidaNetworks Serveis Telemàtics
Does LleidaNetworks Serveis Telemàtics Have A Relatively High Or Low P/E For Its Industry?
LleidaNetworks Serveis Telemàtics's P/E of 38.64 indicates some degree of optimism towards the stock. The image below shows that LleidaNetworks Serveis Telemàtics has a higher P/E than the average (18.2) P/E for companies in the telecom industry.
Its relatively high P/E ratio indicates that LleidaNetworks Serveis Telemàtics shareholders think it will perform better than other companies in its industry classification. 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
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 unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
LleidaNetworks Serveis Telemàtics's 293% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does LleidaNetworks Serveis Telemàtics's Debt Impact Its P/E Ratio?
LleidaNetworks Serveis Telemàtics has net debt worth just 1.9% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On LleidaNetworks Serveis Telemàtics's P/E Ratio
LleidaNetworks Serveis Telemàtics trades on a P/E ratio of 38.6, which is above its market average of 14.6. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio. What is very clear is that the market has become significantly more optimistic about LleidaNetworks Serveis Telemàtics over the last month, with the P/E ratio rising from 23.8 back then to 38.6 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than LleidaNetworks Serveis Telemàtics. 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.