To the annoyance of some shareholders, Canterbury Park Holding (NASDAQ:CPHC) shares are down a considerable in the last month. The recent drop has obliterated the annual return, with the share price now down 18% over that longer period. On the bright side, the share price is slightly up over the last 90 days.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
How Does Canterbury Park Holding's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 12.90 that sentiment around Canterbury Park Holding isn't particularly high. The image below shows that Canterbury Park Holding has a lower P/E than the average (25.2) P/E for companies in the hospitality industry.
Its relatively low P/E ratio indicates that Canterbury Park Holding shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Canterbury Park Holding's earnings per share fell by 16% in the last twelve months. But it has grown its earnings per share by 18% per year over the last five years. And EPS is down 1.7% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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.
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 Canterbury Park Holding's Balance Sheet Tell Us?
Net debt totals just 0.5% of Canterbury Park Holding's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Canterbury Park Holding's P/E Ratio
Canterbury Park Holding's P/E is 12.9 which is below average (19.1) in the US market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Canterbury Park Holding's P/E ratio has declined from 12.9 to 12.9 in the last month, we know for sure that the market is less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at email@example.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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