A Sliding Share Price Has Us Looking At Mastermyne Group Limited's (ASX:MYE) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Mastermyne Group (ASX:MYE) share price has dived 48% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 46% in that time.

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). 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 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 Mastermyne Group

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

We can tell from its P/E ratio of 5.65 that sentiment around Mastermyne Group isn't particularly high. The image below shows that Mastermyne Group has a lower P/E than the average (6.9) P/E for companies in the metals and mining industry.

ASX:MYE Price Estimation Relative to Market March 26th 2020

Mastermyne Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. Then, a lower P/E should attract more buyers, pushing the share price up.

Mastermyne Group's 58% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.

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. Thus, the metric does not reflect cash or debt held by the company. 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 Mastermyne Group's Balance Sheet Tell Us?

The extra options and safety that comes with Mastermyne Group's AU$4.9m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Mastermyne Group's P/E Ratio

Mastermyne Group's P/E is 5.6 which is below average (12.5) in the AU market. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The relatively low P/E ratio implies the market is pessimistic. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer What can be absolutely certain is that the market has become more pessimistic about Mastermyne Group over the last month, with the P/E ratio falling from 10.9 back then to 5.6 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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.