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How Does HiTech Group Australia's (ASX:HIT) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, HiTech Group Australia (ASX:HIT) shares are down a considerable 36% in the last month. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.

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. 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.

See our latest analysis for HiTech Group Australia

Does HiTech Group Australia Have A Relatively High Or Low P/E For Its Industry?

HiTech Group Australia's P/E is 12.36. As you can see below HiTech Group Australia has a P/E ratio that is fairly close for the average for the professional services industry, which is 11.7.

ASX:HIT Price Estimation Relative to Market April 2nd 2020
ASX:HIT Price Estimation Relative to Market April 2nd 2020

That indicates that the market expects HiTech Group Australia will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

Most would be impressed by HiTech Group Australia earnings growth of 11% in the last year. And earnings per share have improved by 1.4% annually, over the last three years. With that performance, you might expect an above average P/E ratio.

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. 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.

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 HiTech Group Australia's Debt Impact Its P/E Ratio?

With net cash of AU$6.7m, HiTech Group Australia has a very strong balance sheet, which may be important for its business. Having said that, at 18% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On HiTech Group Australia's P/E Ratio

HiTech Group Australia's P/E is 12.4 which is below average (13.4) in the AU market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. One might conclude that the market is a bit pessimistic, given the low P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about HiTech Group Australia over the last month, with the P/E ratio falling from 19.3 back then to 12.4 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than HiTech Group Australia. 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.