U.S. Markets closed

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

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Pangaea Logistics Solutions, Ltd.'s (NASDAQ:PANL), to help you decide if the stock is worth further research. Pangaea Logistics Solutions has a P/E ratio of 8.51, based on the last twelve months. That corresponds to an earnings yield of approximately 12%.

View our latest analysis for Pangaea Logistics Solutions

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Pangaea Logistics Solutions:

P/E of 8.51 = $3.44 ÷ $0.40 (Based on the year to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Pangaea Logistics Solutions's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Pangaea Logistics Solutions has a lower P/E than the average (16) P/E for companies in the shipping industry.

NasdaqCM:PANL Price Estimation Relative to Market, August 12th 2019

Its relatively low P/E ratio indicates that Pangaea Logistics Solutions shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Pangaea Logistics Solutions, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Pangaea Logistics Solutions's 50% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. And earnings per share have improved by 42% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Pangaea Logistics Solutions's Debt Impact Its P/E Ratio?

Pangaea Logistics Solutions has net debt equal to 35% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Pangaea Logistics Solutions's P/E Ratio

Pangaea Logistics Solutions has a P/E of 8.5. That's below the average in the US market, which is 17.4. The company hasn't stretched its balance sheet, and earnings growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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.

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. Thank you for reading.