How Does Prosegur Compañía de Seguridad's (BME:PSG) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Prosegur Compañía de Seguridad (BME:PSG) share price has dived 35% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 53% 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). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
See our latest analysis for Prosegur Compañía de Seguridad
Does Prosegur Compañía de Seguridad Have A Relatively High Or Low P/E For Its Industry?
Prosegur Compañía de Seguridad has a P/E ratio of 11.93. The image below shows that Prosegur Compañía de Seguridad has a P/E ratio that is roughly in line with the commercial services industry average (12.6).
That indicates that the market expects Prosegur Compañía de Seguridad will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Prosegur Compañía de Seguridad saw earnings per share decrease by 13% last year. And over the longer term (5 years) earnings per share have decreased 6.3% annually. This could justify a pessimistic P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Prosegur Compañía de Seguridad's Balance Sheet
Prosegur Compañía de Seguridad has net debt worth 59% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Prosegur Compañía de Seguridad's P/E Ratio
Prosegur Compañía de Seguridad trades on a P/E ratio of 11.9, which is below the ES market average of 13.9. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future. What can be absolutely certain is that the market has become significantly less optimistic about Prosegur Compañía de Seguridad over the last month, with the P/E ratio falling from 18.3 back then to 11.9 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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Prosegur Compañía de Seguridad may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
