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How Does DPA Group's (AMS:DPA) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the DPA Group (AMS:DPA) share price has dived 42% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 52% 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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.

View our latest analysis for DPA Group

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

DPA Group's P/E of 4.28 indicates relatively low sentiment towards the stock. The image below shows that DPA Group has a lower P/E than the average (11.9) P/E for companies in the professional services industry.

ENXTAM:DPA Price Estimation Relative to Market April 7th 2020
ENXTAM:DPA Price Estimation Relative to Market April 7th 2020

Its relatively low P/E ratio indicates that DPA Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with DPA Group, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

DPA Group saw earnings per share decrease by 5.7% last year. But EPS is up 39% over the last 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

So What Does DPA Group's Balance Sheet Tell Us?

Net debt is 26% of DPA Group's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On DPA Group's P/E Ratio

DPA Group trades on a P/E ratio of 4.3, which is below the NL market average of 14.9. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What can be absolutely certain is that the market has become more pessimistic about DPA Group over the last month, with the P/E ratio falling from 7.4 back then to 4.3 today. 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 it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

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.