The QMS Media (ASX:QMS) share price has done well in the last month, posting a gain of 36%. The full year gain of 30% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 QMS Media
How Does QMS Media's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 45.14 that there is some investor optimism about QMS Media. As you can see below, QMS Media has a much higher P/E than the average company (13.7) in the media industry.
That means that the market expects QMS Media will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.
QMS Media's earnings per share fell by 31% in the last twelve months. And over the longer term (3 years) earnings per share have decreased 17% annually. This might lead to low expectations.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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.
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).
How Does QMS Media's Debt Impact Its P/E Ratio?
QMS Media's net debt equates to 37% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.