Yahoo Finance What Is Seven Generations Energy's (TSE:VII) P/E Ratio After Its Share Price Rocketed?
Seven Generations Energy (TSE:VII) shareholders are no doubt pleased to see that the share price has bounced 55% in the last month alone, although it is still down 67% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 79% share price decline throughout the year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 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.
Check out our latest analysis for Seven Generations Energy
Does Seven Generations Energy Have A Relatively High Or Low P/E For Its Industry?
Seven Generations Energy's P/E of 1.66 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Seven Generations Energy has a lower P/E than the average (8.1) in the oil and gas industry classification.
Its relatively low P/E ratio indicates that Seven Generations Energy shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Seven Generations Energy, it's quite possible it could surprise on the upside. 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
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 even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It's great to see that Seven Generations Energy grew EPS by 11% in the last year. And earnings per share have improved by 13% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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 Seven Generations Energy's P/E?
Net debt totals a substantial 262% of Seven Generations Energy's market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Verdict On Seven Generations Energy's P/E Ratio
Seven Generations Energy trades on a P/E ratio of 1.7, which is below the CA market average of 11.6. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified. What we know for sure is that investors are becoming less uncomfortable about Seven Generations Energy's prospects, since they have pushed its P/E ratio from 1.1 to 1.7 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Seven Generations Energy. 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.
