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How Does AstroNova's (NASDAQ:ALOT) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 mins read

To the annoyance of some shareholders, AstroNova (NASDAQ:ALOT) shares are down a considerable 31% in the last month. And that drop will have no doubt have some shareholders concerned that the 67% share price decline, over the last year, has turned them into bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.

Assuming nothing else has changed, a lower share price makes a stock more 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 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). 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.

Check out our latest analysis for AstroNova

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

AstroNova's P/E of 31.03 indicates some degree of optimism towards the stock. As you can see below, AstroNova has a higher P/E than the average company (17.1) in the tech industry.

NasdaqGM:ALOT Price Estimation Relative to Market April 1st 2020
NasdaqGM:ALOT Price Estimation Relative to Market April 1st 2020

AstroNova'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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

AstroNova shrunk earnings per share by 70% over the last year. And over the longer term (5 years) earnings per share have decreased 16% annually. This could justify a pessimistic P/E.

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

Don't forget that the P/E ratio considers market capitalization. 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.

How Does AstroNova's Debt Impact Its P/E Ratio?

Net debt is 27% of AstroNova's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On AstroNova's P/E Ratio

AstroNova's P/E is 31.0 which is above average (13.1) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What can be absolutely certain is that the market has become significantly less optimistic about AstroNova over the last month, with the P/E ratio falling from 45.1 back then to 31.0 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. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than AstroNova. 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.