U.S. Markets open in 7 hrs 58 mins

How Does Envela's (NYSEMKT:ELA) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Envela (NYSEMKT:ELA) shares have continued recent momentum with a 32% gain in the last month alone. The 337% gain over the last year is certainly lovely to see, just like a wink and smile from your sweetheart.

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. 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.

Check out our latest analysis for Envela

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

We can tell from its P/E ratio of 19.72 that there is some investor optimism about Envela. As you can see below, Envela has a higher P/E than the average company (17.2) in the specialty retail industry.

AMEX:ELA Price Estimation Relative to Market, January 24th 2020

That means that the market expects Envela will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Envela's earnings made like a rocket, taking off 187% last year.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. 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.

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 Envela's Debt Impact Its P/E Ratio?

Envela has net debt worth 15% of its market capitalization. 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 Verdict On Envela's P/E Ratio

Envela's P/E is 19.7 which is about average (18.8) in the US market. With only modest debt levels, and strong earnings growth, the market seems to doubt that the growth can be maintained. What is very clear is that the market has become more optimistic about Envela over the last month, with the P/E ratio rising from 14.9 back then to 19.7 today. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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. 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 be able to find a better stock than Envela. 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.