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How Does Quickstep Holdings's (ASX:QHL) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 mins read

To the annoyance of some shareholders, Quickstep Holdings (ASX:QHL) shares are down a considerable 34% in the last month. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.

Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 Quickstep Holdings

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

Quickstep Holdings's P/E is 18.74. As you can see below Quickstep Holdings has a P/E ratio that is fairly close for the average for the aerospace & defense industry, which is 18.6.

ASX:QHL Price Estimation Relative to Market, March 12th 2020
ASX:QHL Price Estimation Relative to Market, March 12th 2020

Its P/E ratio suggests that Quickstep Holdings shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Quickstep Holdings actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

In the last year, Quickstep Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 186% gain was both fast and well deserved.

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

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

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.

So What Does Quickstep Holdings's Balance Sheet Tell Us?

Quickstep Holdings has net debt worth just 8.5% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On Quickstep Holdings's P/E Ratio

Quickstep Holdings has a P/E of 18.7. That's higher than the average in its market, which is 16.2. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable. Given Quickstep Holdings's P/E ratio has declined from 28.3 to 18.7 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors should be looking to buy stocks that the market is wrong about. 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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Quickstep Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.