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How Does Forward Air's (NASDAQ:FWRD) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Those holding Forward Air (NASDAQ:FWRD) shares must be pleased that the share price has rebounded 30% in the last thirty days. But unfortunately, the stock is still down by 26% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 22% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). 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.

See our latest analysis for Forward Air

Does Forward Air Have A Relatively High Or Low P/E For Its Industry?

Forward Air's P/E is 17.31. You can see in the image below that the average P/E (18.3) for companies in the logistics industry is roughly the same as Forward Air's P/E.

NasdaqGS:FWRD Price Estimation Relative to Market April 18th 2020

Its P/E ratio suggests that Forward Air shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Forward Air actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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.

Forward Air shrunk earnings per share by 2.5% last year. But it has grown its earnings per share by 9.0% per year over the last five years.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.

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.

Forward Air's Balance Sheet

Forward Air's net debt is 0.2% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On Forward Air's P/E Ratio

Forward Air's P/E is 17.3 which is above average (13.6) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits. What is very clear is that the market has become more optimistic about Forward Air over the last month, with the P/E ratio rising from 13.3 back then to 17.3 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Forward Air. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.