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

Simply Wall St

Hasbro (NASDAQ:HAS) shareholders are no doubt pleased to see that the share price has bounced 41% in the last month alone, although it is still down 26% over the last 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. 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 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 Hasbro

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

Hasbro's P/E of 18.60 indicates some degree of optimism towards the stock. The image below shows that Hasbro has a higher P/E than the average (13.8) P/E for companies in the leisure industry.

NasdaqGS:HAS Price Estimation Relative to Market April 11th 2020

That means that the market expects Hasbro will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. 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

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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

In the last year, Hasbro grew EPS like Taylor Swift grew her fan base back in 2010; the 133% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down -4.7% per year over 3 years.

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. 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 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.

Hasbro's Balance Sheet

The extra options and safety that comes with Hasbro's US$559m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Hasbro's P/E Ratio

Hasbro has a P/E of 18.6. That's higher than the average in its market, which is 14.0. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Hasbro to have a high P/E ratio. What is very clear is that the market has become significantly more optimistic about Hasbro over the last month, with the P/E ratio rising from 13.2 back then to 18.6 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.

Investors should be looking to buy stocks that the market is wrong about. 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.

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.