A Sliding Share Price Has Us Looking At EnviTec Biogas AG's (ETR:ETG) P/E Ratio

Unfortunately for some shareholders, the EnviTec Biogas (ETR:ETG) share price has dived 30% in the last thirty days. Looking back over the last year, the stock has been a solid performer, with a gain of 26%.

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.

See our latest analysis for EnviTec Biogas

How Does EnviTec Biogas's P/E Ratio Compare To Its Peers?

EnviTec Biogas's P/E of 24.89 indicates some degree of optimism towards the stock. The image below shows that EnviTec Biogas has a significantly higher P/E than the average (5.3) P/E for companies in the oil and gas industry.

EnviTec Biogas's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.

EnviTec Biogas increased earnings per share by 2.9% last year. And it has bolstered its earnings per share by 7.5% per year over the last five years.

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

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

EnviTec Biogas's Balance Sheet

EnviTec Biogas has net debt worth 15% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Bottom Line On EnviTec Biogas's P/E Ratio

EnviTec Biogas has a P/E of 24.9. That's higher than the average in its market, which is 15.2. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future. What can be absolutely certain is that the market has become significantly less optimistic about EnviTec Biogas over the last month, with the P/E ratio falling from 35.7 back then to 24.9 today. 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: EnviTec Biogas may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.