U.S. markets closed

How Does Turtle Beach's (NASDAQ:HEAR) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Turtle Beach (NASDAQ:HEAR) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 20% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 44% in the last year.

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). 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.

See our latest analysis for Turtle Beach

Does Turtle Beach Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 5.48 that sentiment around Turtle Beach isn't particularly high. If you look at the image below, you can see Turtle Beach has a lower P/E than the average (8.3) in the consumer durables industry classification.

NasdaqGM:HEAR Price Estimation Relative to Market April 12th 2020

Turtle Beach's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Turtle Beach, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Turtle Beach's earnings per share fell by 57% in the last twelve months.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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 Turtle Beach's Balance Sheet Tell Us?

Net debt totals just 7.5% of Turtle Beach's market cap. 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 Turtle Beach's P/E Ratio

Turtle Beach trades on a P/E ratio of 5.5, which is below the US market average of 14.0. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What is very clear is that the market has become less pessimistic about Turtle Beach over the last month, with the P/E ratio rising from 4.2 back then to 5.5 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Turtle Beach. 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.