U.S. Markets closed

How Does Bonanza Creek Energy's (NYSE:BCEI) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Those holding Bonanza Creek Energy (NYSE:BCEI) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 6.2% over a quarter. The full year gain of 17% is pretty reasonable, too.

All else being equal, a sharp share price increase should make a stock less 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 deep value investors might steer clear when expectations of a company are too high. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Bonanza Creek Energy

Does Bonanza Creek Energy Have A Relatively High Or Low P/E For Its Industry?

Bonanza Creek Energy's P/E of 2.65 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Bonanza Creek Energy has a lower P/E than the average (10.8) in the oil and gas industry classification.

NYSE:BCEI Price Estimation Relative to Market, December 21st 2019

Its relatively low P/E ratio indicates that Bonanza Creek Energy shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Bonanza Creek Energy, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, Bonanza Creek Energy grew EPS like Taylor Swift grew her fan base back in 2010; the 211% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 48% per year over 5 years.

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

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 15% of Bonanza Creek Energy's market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Bottom Line On Bonanza Creek Energy's P/E Ratio

Bonanza Creek Energy has a P/E of 2.6. That's below the average in the US market, which is 18.9. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What we know for sure is that investors are becoming less uncomfortable about Bonanza Creek Energy's prospects, since they have pushed its P/E ratio from 2.0 to 2.6 over the last month. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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.