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How Does Green Brick Partners's (NASDAQ:GRBK) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Green Brick Partners (NASDAQ:GRBK) shareholders are no doubt pleased to see that the share price has bounced 48% in the last month alone, although it is still down 17% over the last quarter. And the full year gain of 20% isn't too shabby, either!

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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

View our latest analysis for Green Brick Partners

How Does Green Brick Partners's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 8.66 that sentiment around Green Brick Partners isn't particularly high. We can see in the image below that the average P/E (9.6) for companies in the consumer durables industry is higher than Green Brick Partners's P/E.

NasdaqCM:GRBK Price Estimation Relative to Market May 21st 2020

Green Brick Partners's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Green Brick Partners, it's quite possible it could surprise on the upside. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Green Brick Partners increased earnings per share by an impressive 17% over the last twelve months. And earnings per share have improved by 31% annually, over the last three years. So one might expect an above average P/E ratio. In contrast, EPS has decreased by 12%, annually, over 5 years.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does Green Brick Partners's Debt Impact Its P/E Ratio?

Green Brick Partners's net debt equates to 39% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Green Brick Partners's P/E Ratio

Green Brick Partners's P/E is 8.7 which is below average (14.8) in the US market. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified. What we know for sure is that investors are becoming less uncomfortable about Green Brick Partners's prospects, since they have pushed its P/E ratio from 5.9 to 8.7 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Green Brick Partners 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).

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.