Unfortunately for some shareholders, the Canterbury Park Holding (NASDAQ:CPHC) share price has dived in the last thirty days. Even longer term holders have taken a real hit with the stock declining 16% in the last year. On the bright side, the share price is slightly up over the last 90 days.
All else being equal, a sharp share price increase should make a stock less 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does Canterbury Park Holding Have A Relatively High Or Low P/E For Its Industry?
Canterbury Park Holding's P/E of 12.59 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Canterbury Park Holding has a lower P/E than the average (23.7) in the hospitality industry classification.
Its relatively low P/E ratio indicates that Canterbury Park Holding shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Canterbury Park Holding, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Canterbury Park Holding saw earnings per share decrease by 16% last year. But EPS is up 18% over the last 5 years. And it has shrunk its earnings per share by 1.7% per year over the last three years. This could justify a low P/E.
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 Canterbury Park Holding's Debt Impact Its P/E Ratio?
Canterbury Park Holding's net debt is 0.5% of its market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Canterbury Park Holding's P/E Ratio
Canterbury Park Holding trades on a P/E ratio of 12.6, which is below the US market average of 18.2. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Canterbury Park Holding's P/E ratio has declined from 12.6 to 12.6 in the last month, we know for sure that the market is less confident about the business today, than it was back then. 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. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at email@example.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.