Yahoo Finance A Sliding Share Price Has Us Looking At Aptitude Software Group plc's (LON:APTD) P/E Ratio
Unfortunately for some shareholders, the Aptitude Software Group (LON:APTD) share price has dived 51% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 48% in that time.
All else being equal, a share price drop should make a stock more 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 Aptitude Software Group
Does Aptitude Software Group Have A Relatively High Or Low P/E For Its Industry?
Aptitude Software Group's P/E is 22.89. As you can see below Aptitude Software Group has a P/E ratio that is fairly close for the average for the software industry, which is 22.9.
That indicates that the market expects Aptitude Software Group will perform roughly in line with other companies in its industry. So if Aptitude Software Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Most would be impressed by Aptitude Software Group earnings growth of 10% in the last year. And it has bolstered its earnings per share by 6.6% per year over the last five years. So one might expect an above average P/E ratio. But earnings per share are down 2.5% per year over the last three years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
How Does Aptitude Software Group's Debt Impact Its P/E Ratio?
Aptitude Software Group has net cash of UK£33m. This is fairly high at 23% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Aptitude Software Group's P/E Ratio
Aptitude Software Group's P/E is 22.9 which is above average (11.2) in its market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Aptitude Software Group over the last month, with the P/E ratio falling from 46.6 back then to 22.9 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 should be looking to buy stocks that the market is wrong about. 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 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 Aptitude Software Group. 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.
