This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Coda Octopus Group, Inc.’s (NASDAQ:CODA) P/E ratio and reflect on what it tells us about the company’s share price. Coda Octopus Group has a P/E ratio of 12.37, based on the last twelve months. In other words, at today’s prices, investors are paying $12.37 for every $1 in prior year profit.
Check out our latest analysis for Coda Octopus Group
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Coda Octopus Group:
P/E of 12.37 = $6.170 ÷ $0.499 (Based on the trailing twelve months to January 2020.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Does Coda Octopus Group’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Coda Octopus Group has a lower P/E than the average (16.9) in the electronic industry classification.
NasdaqCM:CODA Price Estimation Relative to Market May 5th 2020
Coda Octopus 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. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Coda Octopus Group shrunk earnings per share by 18% over the last year. But it has grown its earnings per share by 13% per year over the last five years. And it has shrunk its earnings per share by 11% per year over the last three years. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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.
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 Coda Octopus Group’s Balance Sheet Tell Us?
With net cash of US$12m, Coda Octopus Group 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 Coda Octopus Group’s P/E Ratio
Coda Octopus Group has a P/E of 12.4. That’s below the average in the US market, which is 14.3. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Coda Octopus Group. 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).
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