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How Does USANA Health Sciences's (NYSE:USNA) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Those holding USANA Health Sciences (NYSE:USNA) shares must be pleased that the share price has rebounded 44% in the last thirty days. But unfortunately, the stock is still down by 15% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 16% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. 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.

Check out our latest analysis for USANA Health Sciences

How Does USANA Health Sciences's P/E Ratio Compare To Its Peers?

USANA Health Sciences's P/E of 15.45 indicates some degree of optimism towards the stock. As you can see below, USANA Health Sciences has a higher P/E than the average company (11.5) in the personal products industry.

NYSE:USNA Price Estimation Relative to Market April 20th 2020

Its relatively high P/E ratio indicates that USANA Health Sciences 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. 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.

USANA Health Sciences shrunk earnings per share by 15% over the last year. But it has grown its earnings per share by 8.9% per year over the last five years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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).

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).

USANA Health Sciences's Balance Sheet

USANA Health Sciences has net cash of US$235m. This is fairly high at 16% 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 Verdict On USANA Health Sciences's P/E Ratio

USANA Health Sciences has a P/E of 15.5. That's higher than the average in its market, which is 13.6. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What we know for sure is that investors have become more excited about USANA Health Sciences recently, since they have pushed its P/E ratio from 10.8 to 15.5 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. 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 USANA Health Sciences. 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.