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How Does Alaska Communications Systems Group's (NASDAQ:ALSK) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

The Alaska Communications Systems Group (NASDAQ:ALSK) share price has done well in the last month, posting a gain of 32%. The full year gain of 49% is pretty reasonable, too.

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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for Alaska Communications Systems Group

Does Alaska Communications Systems Group Have A Relatively High Or Low P/E For Its Industry?

Alaska Communications Systems Group's P/E of 19.37 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (12.3) for companies in the telecom industry is lower than Alaska Communications Systems Group's P/E.

NasdaqGS:ALSK Price Estimation Relative to Market May 23rd 2020

Alaska Communications Systems Group's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Alaska Communications Systems Group shrunk earnings per share by 1.3% last year. But over the longer term (3 years), earnings per share have increased by 62%. And EPS is down 14% a year, over the last 5 years. So we might expect a relatively low P/E.

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

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. 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.

So What Does Alaska Communications Systems Group's Balance Sheet Tell Us?

Alaska Communications Systems Group has net debt worth 99% of its market capitalization. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Bottom Line On Alaska Communications Systems Group's P/E Ratio

Alaska Communications Systems Group has a P/E of 19.4. That's higher than the average in its market, which is 15.0. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. What is very clear is that the market has become more optimistic about Alaska Communications Systems Group over the last month, with the P/E ratio rising from 14.7 back then to 19.4 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don't have analyst forecasts 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 Alaska Communications Systems Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.