Yahoo Finance What Is Atrium Mortgage Investment's (TSE:AI) P/E Ratio After Its Share Price Rocketed?
Those holding Atrium Mortgage Investment (TSE:AI) shares must be pleased that the share price has rebounded 38% in the last thirty days. But unfortunately, the stock is still down by 35% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 30% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. 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 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.
See our latest analysis for Atrium Mortgage Investment
Does Atrium Mortgage Investment Have A Relatively High Or Low P/E For Its Industry?
Atrium Mortgage Investment's P/E of 9.76 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (6.7) for companies in the mortgage industry is lower than Atrium Mortgage Investment's P/E.
Atrium Mortgage Investment's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Atrium Mortgage Investment's earnings per share grew by 2.6% in the last twelve months. And it has bolstered its earnings per share by 1.4% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Atrium Mortgage Investment's Balance Sheet Tell Us?
Net debt totals 69% of Atrium Mortgage Investment's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Atrium Mortgage Investment's P/E Ratio
Atrium Mortgage Investment's P/E is 9.8 which is below average (11.5) in the CA market. While the recent EPS growth is a positive, the significant amount of debt on the balance sheet may be contributing to pessimistic market expectations. What we know for sure is that investors are becoming less uncomfortable about Atrium Mortgage Investment's prospects, since they have pushed its P/E ratio from 7.1 to 9.8 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
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 Atrium Mortgage Investment. 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).
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.
