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How Does SeaLink Travel Group's (ASX:SLK) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

SeaLink Travel Group (ASX:SLK) shareholders are no doubt pleased to see that the share price has had a great month, posting a 33% gain, recovering from prior weakness. However, the annual gain of 9.4% wasn't so impressive.

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. 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). 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.

See our latest analysis for SeaLink Travel Group

How Does SeaLink Travel Group's P/E Ratio Compare To Its Peers?

SeaLink Travel Group has a P/E ratio of 21.89. The image below shows that SeaLink Travel Group has a P/E ratio that is roughly in line with the hospitality industry average (23.4).

ASX:SLK Price Estimation Relative to Market, October 9th 2019

SeaLink Travel Group's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

SeaLink Travel Group increased earnings per share by 9.8% last year. And its annual EPS growth rate over 5 years is 14%. But earnings per share are down 3.5% per year over the last three years.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).

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 SeaLink Travel Group's Balance Sheet Tell Us?

SeaLink Travel Group's net debt is 21% of its market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On SeaLink Travel Group's P/E Ratio

SeaLink Travel Group trades on a P/E ratio of 21.9, which is above its market average of 18.4. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future. What we know for sure is that investors have become much more excited about SeaLink Travel Group recently, since they have pushed its P/E ratio from 16.5 to 21.9 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: SeaLink Travel Group 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).

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.