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A Sliding Share Price Has Us Looking At IG Design Group plc's (LON:IGR) P/E Ratio

Unfortunately for some shareholders, the IG Design Group (LON:IGR) share price has dived 57% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 45% in that time.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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. 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). 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 IG Design Group

How Does IG Design Group's P/E Ratio Compare To Its Peers?

IG Design Group's P/E of 16.01 indicates some degree of optimism towards the stock. The image below shows that IG Design Group has a higher P/E than the average (7.1) P/E for companies in the consumer durables industry.

AIM:IGR Price Estimation Relative to Market, March 20th 2020
AIM:IGR Price Estimation Relative to Market, March 20th 2020

That means that the market expects IG Design Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

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IG Design Group's earnings per share fell by 23% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 21%.

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does IG Design Group's Debt Impact Its P/E Ratio?

IG Design Group's net debt equates to 29% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On IG Design Group's P/E Ratio

IG Design Group's P/E is 16.0 which is above average (11.2) in its market. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What can be absolutely certain is that the market has become significantly less optimistic about IG Design Group over the last month, with the P/E ratio falling from 37.3 back then to 16.0 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than IG Design Group. 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.