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Does Patriot Transportation Holding, Inc.'s (NASDAQ:PATI) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

Of late the Patriot Transportation Holding (NASDAQ:PATI) share price has softened like an ice cream in the sun, melting a full . The recent drop has obliterated the annual return, with the share price now down 4.7% over that longer period. But those shareholders who nailed the timing of their purchase will be quite happy; the stock has gained 6.4% in the last 90 days.

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 Patriot Transportation Holding

Does Patriot Transportation Holding Have A Relatively High Or Low P/E For Its Industry?

Patriot Transportation Holding's P/E of 28.84 indicates some degree of optimism towards the stock. As you can see below, Patriot Transportation Holding has a higher P/E than the average company (18.8) in the transportation industry.

NasdaqGS:PATI Price Estimation Relative to Market, December 6th 2019

Its relatively high P/E ratio indicates that Patriot Transportation Holding shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Patriot Transportation Holding shrunk earnings per share by 53% over the last year. And over the longer term (5 years) earnings per share have decreased 12% annually. This might lead to muted expectations.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

Patriot Transportation Holding's Balance Sheet

Patriot Transportation Holding has net cash of US$20m. This is fairly high at 34% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Patriot Transportation Holding's P/E Ratio

Patriot Transportation Holding trades on a P/E ratio of 28.8, which is above its market average of 18.3. The recent drop in earnings per share might keep value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls. Given Patriot Transportation Holding's P/E ratio has declined from 28.8 to 28.8 in the last month, we know for sure that the market is less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Patriot Transportation Holding 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.