Advertisement

What Is BigBen Interactive's (EPA:BIG) P/E Ratio After Its Share Price Tanked?

To the annoyance of some shareholders, BigBen Interactive (EPA:BIG) shares are down a considerable 35% in the last month. The stock has been solid, longer term, gaining 15% in the last year.

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.

Check out our latest analysis for BigBen Interactive

Does BigBen Interactive Have A Relatively High Or Low P/E For Its Industry?

BigBen Interactive's P/E of 9.74 indicates relatively low sentiment towards the stock. The image below shows that BigBen Interactive has a lower P/E than the average (12.5) P/E for companies in the consumer durables industry.

ENXTPA:BIG Price Estimation Relative to Market April 2nd 2020
ENXTPA:BIG Price Estimation Relative to Market April 2nd 2020

This suggests that market participants think BigBen Interactive will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

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. 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.

BigBen Interactive's earnings made like a rocket, taking off 70% last year. Even better, EPS is up 72% per year over three years. So you might say it really deserves to have an above-average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 BigBen Interactive's Balance Sheet Tell Us?

BigBen Interactive's net debt equates to 29% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On BigBen Interactive's P/E Ratio

BigBen Interactive's P/E is 9.7 which is below average (13.2) in the FR market. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can take a closer look at the fundamentals, here. Given BigBen Interactive's P/E ratio has declined from 15.1 to 9.7 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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 BigBen Interactive. 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.