【floating the catawba river】A Sliding Share Price Has Us Looking At New Work SE's (ETR:NWO) P/E Ratio

To the annoyance of some shareholders,floating the catawba river

New Work

(

ETR:NWO

) shares are down a considerable 31% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 31% drop over twelve months.

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. One way to gauge market expectations of a stock 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.

Check out our latest analysis for New Work

Does New Work Have A Relatively High Or Low P/E For Its Industry?

New Work has a P/E ratio of 33.77. As you can see below New Work has a P/E ratio that is fairly close for the average for the interactive media and services industry, which is 33.4.

XTRA:NWO Price Estimation Relative to Market, March 10th 2020

New Work's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Most would be impressed by New Work earnings growth of 11% in the last year. And its annual EPS growth rate over 5 years is 41%. With that performance, you might expect an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).

Story continues

How Does New Work's Debt Impact Its P/E Ratio?

Since New Work holds net cash of €40m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On New Work's P/E Ratio

New Work's P/E is 33.8 which is above average (18.6) in its market. With cash in the bank the company has plenty of growth options -- and it is already on the right track. So it does not seem strange that the P/E is above average. Given New Work's P/E ratio has declined from 49.3 to 33.8 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.

Investors have an opportunity when market expectations about a stock are wrong. 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. So this

free

report on the analyst consensus forecasts

could help you make a

master move

on this stock.

Of course

you might be able to find a better stock than New Work

. 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

[email protected]

. 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.

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