Yahoo Finance What Is Points International's (TSE:PTS) P/E Ratio After Its Share Price Tanked?
To the annoyance of some shareholders, Points International (TSE:PTS) shares are down a considerable 45% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 30% 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Points International
Does Points International Have A Relatively High Or Low P/E For Its Industry?
Points International's P/E of 10.25 indicates relatively low sentiment towards the stock. The image below shows that Points International has a lower P/E than the average (22.3) P/E for companies in the online retail industry.
Points International's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Points International grew EPS like Taylor Swift grew her fan base back in 2010; the 60% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 23% per year. With that kind of growth rate we would generally expect a high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
So What Does Points International's Balance Sheet Tell Us?
With net cash of US$70m, Points International has a very strong balance sheet, which may be important for its business. Having said that, at 62% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Points International's P/E Ratio
Points International trades on a P/E ratio of 10.2, which is fairly close to the CA market average of 10.7. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Points International to have a higher P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Points International over the last month, with the P/E ratio falling from 18.6 back then to 10.2 today. 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.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Points International. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
