What Is Green Brick Partners's (NASDAQ:GRBK) P/E Ratio After Its Share Price Rocketed?
Those holding Green Brick Partners (NASDAQ:GRBK) shares must be pleased that the share price has rebounded 37% in the last thirty days. But unfortunately, the stock is still down by 28% over a quarter. But that gain wasn't enough to make shareholders whole, as the share price is still down 6.0% in the last year.
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. 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.
Check out our latest analysis for Green Brick Partners
How Does Green Brick Partners's P/E Ratio Compare To Its Peers?
Green Brick Partners's P/E of 7.34 indicates relatively low sentiment towards the stock. The image below shows that Green Brick Partners has a lower P/E than the average (8.3) P/E for companies in the consumer durables industry.
Green Brick Partners'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 Green Brick Partners, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Green Brick Partners grew EPS by 14% in the last year. And earnings per share have improved by 34% annually, over the last three years. This could arguably justify a relatively high P/E ratio. In contrast, EPS has decreased by 19%, annually, over 5 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. 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).
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 Green Brick Partners's Balance Sheet Tell Us?
Green Brick Partners has net debt equal to 48% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Green Brick Partners's P/E Ratio
Green Brick Partners trades on a P/E ratio of 7.3, which is below the US market average of 14.4. The company hasn't stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What is very clear is that the market has become less pessimistic about Green Brick Partners over the last month, with the P/E ratio rising from 5.4 back then to 7.3 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have 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.
But note: Green Brick Partners 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).
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.
