U.S. markets closed

How Does Bapcor's (ASX:BAP) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

Unfortunately for some shareholders, the Bapcor (ASX:BAP) share price has dived 32% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 23% over that longer period.

All else being equal, a share price drop should make a stock more 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 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 Bapcor

How Does Bapcor's P/E Ratio Compare To Its Peers?

Bapcor's P/E is 13.55. The image below shows that Bapcor has a P/E ratio that is roughly in line with the retail distributors industry average (14.6).

ASX:BAP Price Estimation Relative to Market, March 16th 2020

Its P/E ratio suggests that Bapcor shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Bapcor actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. 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.

Bapcor's earnings per share grew by -6.7% in the last twelve months. And its annual EPS growth rate over 5 years is 37%.

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

The 'Price' in P/E reflects the market capitalization of the company. 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.

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 Bapcor's Debt Impact Its P/E Ratio?

Bapcor's net debt equates to 26% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Bapcor's P/E Ratio

Bapcor has a P/E of 13.5. That's below the average in the AU market, which is 14.9. The company hasn't stretched its balance sheet, and earnings are improving. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value. What can be absolutely certain is that the market has become significantly less optimistic about Bapcor over the last month, with the P/E ratio falling from 20.0 back then to 13.5 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 should be looking to buy stocks that the market is wrong about. 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. 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 Bapcor. 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.