A Rising Share Price Has Us Looking Closely At Exchange Income Corporation’s (TS…

TSE:EIF) shareholders are no doubt pleased to see that the share price has bounced 35% in the last month alone, although it is still down 48% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 34% in the last year.” data-reactid=”28″Exchange Income (TSE:EIF) shareholders are no doubt pleased to see that the share price has bounced 35% in the last month alone, although it is still down 48% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 34% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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 Exchange Income ” data-reactid=”30″ See our latest analysis for Exchange Income

How Does Exchange Income’s P/E Ratio Compare To Its Peers?

Exchange Income’s P/E of 8.95 indicates some degree of optimism towards the stock. As you can see below, Exchange Income has a higher P/E than the average company (3.6) in the airlines industry.

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whether company directors have been buying shares.” data-reactid=”45″Exchange Income’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 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

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It’s great to see that Exchange Income grew EPS by 15% in the last year. And it has improved its earnings per share by 5.7% per year over the last three years. So one 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. 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…