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Does Pangaea Logistics Solutions, Ltd.'s (NASDAQ:PANL) P/E Ratio Signal A Buying Opportunity?

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Unfortunately for some shareholders, the Pangaea Logistics Solutions (NASDAQ:PANL) share price has dived in the last thirty days. Indeed, the recent drop has reduced the annual gain to a relatively sedate 2.0% over the last twelve months.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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.

Check out our latest analysis for Pangaea Logistics Solutions

Does Pangaea Logistics Solutions Have A Relatively High Or Low P/E For Its Industry?

Pangaea Logistics Solutions's P/E of 8.37 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (19.1) for companies in the shipping industry is higher than Pangaea Logistics Solutions's P/E.

NasdaqCM:PANL Price Estimation Relative to Market, January 23rd 2020
NasdaqCM:PANL Price Estimation Relative to Market, January 23rd 2020

Pangaea Logistics Solutions's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Pangaea Logistics Solutions saw earnings per share decrease by 32% last year. But over the longer term (3 years), earnings per share have increased by 69%.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Pangaea Logistics Solutions's Balance Sheet

Net debt totals 59% of Pangaea Logistics Solutions's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Verdict On Pangaea Logistics Solutions's P/E Ratio

Pangaea Logistics Solutions's P/E is 8.4 which is below average (18.8) in the US market. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. What can be absolutely certain is that the market has become more pessimistic about Pangaea Logistics Solutions over the last month, with the P/E ratio falling from 8.4 back then to 8.4 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Pangaea Logistics Solutions 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).

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.