Yahoo Finance A Rising Share Price Has Us Looking Closely At Altura Energy Inc.'s (CVE:ATU) P/E Ratio
Those holding Altura Energy (CVE:ATU) shares must be pleased that the share price has rebounded 50% in the last thirty days. But unfortunately, the stock is still down by 21% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 49% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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.
Check out our latest analysis for Altura Energy
How Does Altura Energy's P/E Ratio Compare To Its Peers?
Altura Energy's P/E of 11.80 indicates some degree of optimism towards the stock. The image below shows that Altura Energy has a higher P/E than the average (8.1) P/E for companies in the oil and gas industry.
Its relatively high P/E ratio indicates that Altura Energy shareholders think it will perform better than other companies in its industry classification. 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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Altura Energy's earnings per share fell by 18% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 28% annually. This could justify a pessimistic P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Altura Energy's P/E?
Altura Energy has net cash of CA$142k. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Altura Energy's P/E Ratio
Altura Energy's P/E is 11.8 which is about average (11.9) in the CA market. While the absence of growth in the last year is probably causing a degree of pessimism, the healthy balance sheet means the company retains potential for future growth. So it's not surprising to see it trade on a P/E roughly in line with the market. What is very clear is that the market has become more optimistic about Altura Energy over the last month, with the P/E ratio rising from 7.9 back then to 11.8 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', 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 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 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.
