How Does Escalade's (NASDAQ:ESCA) P/E Compare To Its Industry, After Its Big Share Price Gain?
Escalade (NASDAQ:ESCA) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 7.4% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 27% in the last year.
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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for Escalade
How Does Escalade's P/E Ratio Compare To Its Peers?
Escalade's P/E of 13.17 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (19.0) for companies in the leisure industry is higher than Escalade's P/E.
Its relatively low P/E ratio indicates that Escalade shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Escalade's earnings per share fell by 54% in the last twelve months. And it has shrunk its earnings per share by 9.8% per year over the last five years. 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Escalade's Debt Impact Its P/E Ratio?
Escalade has net cash of US$6.2m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Escalade's P/E Ratio
Escalade has a P/E of 13.2. That's below the average in the US market, which is 15.1. The recent drop in earnings per share would almost certainly temper expectations, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. What is very clear is that the market has become more optimistic about Escalade over the last month, with the P/E ratio rising from 9.9 back then to 13.2 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph 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 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.
