Unfortunately for some shareholders, the Firan Technology Group (TSE:FTG) share price has dived 45% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 41% drop over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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, 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). 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.
How Does Firan Technology Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 6.97 that sentiment around Firan Technology Group isn't particularly high. The image below shows that Firan Technology Group has a lower P/E than the average (13.4) P/E for companies in the electronic industry.
Its relatively low P/E ratio indicates that Firan Technology Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Firan Technology Group, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Firan Technology Group's 111% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The sweetener is that the annual five year growth rate of 17% is also impressive. So I'd be surprised if the P/E ratio was not above average. Regrettably, the longer term performance is poor, with EPS down -17% per year over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Is Debt Impacting Firan Technology Group's P/E?
Since Firan Technology Group holds net cash of CA$2.1m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Firan Technology Group's P/E Ratio
Firan Technology Group's P/E is 7.0 which is below average (10.7) in the CA market. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The relatively low P/E ratio implies the market is pessimistic. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can take a closer look at the fundamentals, here. What can be absolutely certain is that the market has become more pessimistic about Firan Technology Group over the last month, with the P/E ratio falling from 12.6 back then to 7.0 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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.
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