What Is Helloworld Travel's (ASX:HLO) P/E Ratio After Its Share Price Rocketed?
Those holding Helloworld Travel (ASX:HLO) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 59% over a quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 65% share price decline throughout the 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). 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.
View our latest analysis for Helloworld Travel
Does Helloworld Travel Have A Relatively High Or Low P/E For Its Industry?
Helloworld Travel's P/E of 5.21 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Helloworld Travel has a lower P/E than the average (20.0) in the hospitality industry classification.
This suggests that market participants think Helloworld Travel will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It's great to see that Helloworld Travel grew EPS by 19% in the last year. And earnings per share have improved by 28% annually, over the last three years. With that performance, you might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
Is Debt Impacting Helloworld Travel's P/E?
With net cash of AU$52m, Helloworld Travel has a very strong balance sheet, which may be important for its business. Having said that, at 28% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Helloworld Travel's P/E Ratio
Helloworld Travel's P/E is 5.2 which is below average (14.7) in the AU market. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. One might conclude that the market is a bit pessimistic, given the low P/E ratio. What is very clear is that the market has become less pessimistic about Helloworld Travel over the last month, with the P/E ratio rising from 3.9 back then to 5.2 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Helloworld Travel. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
