How Does Bonanza Creek Energy's (NYSE:BCEI) P/E Compare To Its Industry, After Its Big Share Price Gain?
Bonanza Creek Energy (NYSE:BCEI) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 39% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 40% in the last year.
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. 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.
View our latest analysis for Bonanza Creek Energy
How Does Bonanza Creek Energy's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 4.25 that sentiment around Bonanza Creek Energy isn't particularly high. If you look at the image below, you can see Bonanza Creek Energy has a lower P/E than the average (7.9) in the oil and gas industry classification.
Bonanza Creek Energy's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Bonanza Creek Energy saw earnings per share decrease by 60% last year. And over the longer term (5 years) earnings per share have decreased 41% annually. This might lead to muted expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Bonanza Creek Energy's Debt Impact Its P/E Ratio?
Net debt totals 24% of Bonanza Creek Energy's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Bottom Line On Bonanza Creek Energy's P/E Ratio
Bonanza Creek Energy trades on a P/E ratio of 4.3, which is below the US market average of 13.0. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. What is very clear is that the market has become less pessimistic about Bonanza Creek Energy over the last month, with the P/E ratio rising from 3.2 back then to 4.3 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Bonanza Creek Energy. 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.
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