Those holding Compass Minerals International (NYSE:CMP) shares must be pleased that the share price has rebounded 30% in the last thirty days. But unfortunately, the stock is still down by 19% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 14% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
How Does Compass Minerals International's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 26.32 that there is some investor optimism about Compass Minerals International. As you can see below, Compass Minerals International has a higher P/E than the average company (8.9) in the metals and mining industry.
That means that the market expects Compass Minerals International will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Compass Minerals International shrunk earnings per share by 10% over the last year. And over the longer term (5 years) earnings per share have decreased 22% annually. This might lead to muted expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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 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.
Compass Minerals International's Balance Sheet
Compass Minerals International's net debt is 85% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Compass Minerals International's P/E Ratio
Compass Minerals International trades on a P/E ratio of 26.3, which is above its market average of 14.3. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What we know for sure is that investors have become much more excited about Compass Minerals International recently, since they have pushed its P/E ratio from 20.2 to 26.3 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Compass Minerals International may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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