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How Does Ollie's Bargain Outlet Holdings's (NASDAQ:OLLI) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Ollie's Bargain Outlet Holdings (NASDAQ:OLLI) shares have continued recent momentum with a 34% gain in the last month alone. But shareholders may not all be feeling jubilant, since the share price is still down 26% 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. One way to gauge market expectations of a stock 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.

Check out our latest analysis for Ollie's Bargain Outlet Holdings

How Does Ollie's Bargain Outlet Holdings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 32.80 that there is some investor optimism about Ollie's Bargain Outlet Holdings. As you can see below, Ollie's Bargain Outlet Holdings has a much higher P/E than the average company (6.5) in the multiline retail industry.

NasdaqGM:OLLI Price Estimation Relative to Market May 12th 2020

Its relatively high P/E ratio indicates that Ollie's Bargain Outlet Holdings shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Ollie's Bargain Outlet Holdings increased earnings per share by 3.3% last year. And it has bolstered its earnings per share by 32% per year over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

Is Debt Impacting Ollie's Bargain Outlet Holdings's P/E?

Ollie's Bargain Outlet Holdings has net cash of US$90m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Ollie's Bargain Outlet Holdings's P/E Ratio

Ollie's Bargain Outlet Holdings trades on a P/E ratio of 32.8, which is above its market average of 15.1. Earnings improved over the last year. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will. What we know for sure is that investors have become much more excited about Ollie's Bargain Outlet Holdings recently, since they have pushed its P/E ratio from 24.5 to 32.8 over the last month. 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.

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.