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How Does AdvanSix's (NYSE:ASIX) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 min read

To the annoyance of some shareholders, AdvanSix (NYSE:ASIX) shares are down a considerable 30% in the last month. And that drop will have no doubt have some shareholders concerned that the 70% share price decline, over the last year, has turned them into bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.

All else being equal, a share price drop should make a stock more 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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 AdvanSix

Does AdvanSix Have A Relatively High Or Low P/E For Its Industry?

AdvanSix's P/E of 6.13 indicates relatively low sentiment towards the stock. If you look at the image below, you can see AdvanSix has a lower P/E than the average (17.2) in the chemicals industry classification.

NYSE:ASIX Price Estimation Relative to Market April 21st 2020
NYSE:ASIX Price Estimation Relative to Market April 21st 2020

Its relatively low P/E ratio indicates that AdvanSix shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with AdvanSix, it's quite possible it could surprise on the upside. You 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 even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

AdvanSix shrunk earnings per share by 33% over the last year. But EPS is up 9.5% over the last 3 years. And EPS is down 12% a year, over the last 5 years. This could justify a pessimistic P/E.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Is Debt Impacting AdvanSix's P/E?

AdvanSix has net debt worth a very significant 115% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On AdvanSix's P/E Ratio

AdvanSix trades on a P/E ratio of 6.1, which is below the US market average of 13.6. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. Given AdvanSix's P/E ratio has declined from 8.8 to 6.1 in the last month, we know for sure that the market is more worried 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 deep value investors this stock might justify some research.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than AdvanSix. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.