A Sliding Share Price Has Us Looking At JCurve Solutions Limited's (ASX:JCS) P/E Ratio

Unfortunately for some shareholders, the JCurve Solutions (ASX:JCS) share price has dived 34% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 7.4% in the last year.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. One way to gauge market expectations of a stock 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.

View our latest analysis for JCurve Solutions

Does JCurve Solutions Have A Relatively High Or Low P/E For Its Industry?

JCurve Solutions's P/E is 30.05. The image below shows that JCurve Solutions has a P/E ratio that is roughly in line with the software industry average (28.9).

That indicates that the market expects JCurve Solutions will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

JCurve Solutions increased earnings per share by an impressive 12% over the last twelve months. And earnings per share have improved by 30% annually, over the last three years. So one might expect an above average P/E ratio.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does JCurve Solutions's Balance Sheet Tell Us?

With net cash of AU$3.9m, JCurve Solutions has a very strong balance sheet, which may be important for its business. Having said that, at 48% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On JCurve Solutions's P/E Ratio

JCurve Solutions trades on a P/E ratio of 30.0, which is above its market average of 13.0. With cash in the bank the company has plenty of growth options -- and it is already on the right track. Therefore it seems reasonable that the market would have relatively high expectations of the company Given JCurve Solutions's P/E ratio has declined from 45.7 to 30.0 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don't have analyst forecasts 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 be able to find a better stock than JCurve Solutions. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.