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How Does RBC Bearings's (NASDAQ:ROLL) P/E Compare To Its Industry, After Its Big Share Price Gain?

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RBC Bearings (NASDAQ:ROLL) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 25% over the last quarter. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 RBC Bearings

How Does RBC Bearings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 25.98 that there is some investor optimism about RBC Bearings. You can see in the image below that the average P/E (16.2) for companies in the machinery industry is lower than RBC Bearings's P/E.

NasdaqGS:ROLL Price Estimation Relative to Market April 15th 2020
NasdaqGS:ROLL Price Estimation Relative to Market April 15th 2020

Its relatively high P/E ratio indicates that RBC Bearings shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and 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. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Most would be impressed by RBC Bearings earnings growth of 21% in the last year. And it has bolstered its earnings per share by 14% per year over the last five years. This could arguably justify a relatively high P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. 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.

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).

So What Does RBC Bearings's Balance Sheet Tell Us?

Since RBC Bearings holds net cash of US$38m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On RBC Bearings's P/E Ratio

RBC Bearings trades on a P/E ratio of 26.0, which is above its market average of 13.7. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average. What we know for sure is that investors have become much more excited about RBC Bearings recently, since they have pushed its P/E ratio from 19.4 to 26.0 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than RBC Bearings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.