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What Is New England Realty Associates Limited Partnership's (NYSEMKT:NEN) P/E Ratio After Its Share Price Tanked?

To the annoyance of some shareholders, New England Realty Associates Limited Partnership (NYSEMKT:NEN) 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 38% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for New England Realty Associates Limited Partnership

How Does New England Realty Associates Limited Partnership's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 23.04 that there is some investor optimism about New England Realty Associates Limited Partnership. As you can see below, New England Realty Associates Limited Partnership has a higher P/E than the average company (16.9) in the real estate industry.

AMEX:NEN Price Estimation Relative to Market April 4th 2020
AMEX:NEN Price Estimation Relative to Market April 4th 2020

Its relatively high P/E ratio indicates that New England Realty Associates Limited Partnership shareholders think it will perform better than other companies in its industry classification. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

New England Realty Associates Limited Partnership's earnings made like a rocket, taking off 60% last year. The sweetener is that the annual five year growth rate of 46% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

New England Realty Associates Limited Partnership's Balance Sheet

Net debt totals a substantial 195% of New England Realty Associates Limited Partnership's market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On New England Realty Associates Limited Partnership's P/E Ratio

New England Realty Associates Limited Partnership has a P/E of 23.0. That's higher than the average in its market, which is 12.4. While its debt levels are rather high, at least its EPS is growing quickly. So it seems likely the market is overlooking the debt because of the fast earnings growth. What can be absolutely certain is that the market has become significantly less optimistic about New England Realty Associates Limited Partnership over the last month, with the P/E ratio falling from 33.3 back then to 23.0 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

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 might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than New England Realty Associates Limited Partnership. 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 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.