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Here's What Canterbury Park Holding Corporation's (NASDAQ:CPHC) P/E Ratio Is Telling Us

Simply Wall St

Unfortunately for some shareholders, the Canterbury Park Holding (NASDAQ:CPHC) share price has dived in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 17% over that longer period. At least the stock is still up slightly on where it was at the start of the quarter.

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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Canterbury Park Holding

Does Canterbury Park Holding Have A Relatively High Or Low P/E For Its Industry?

Canterbury Park Holding's P/E of 12.58 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (23.3) for companies in the hospitality industry is higher than Canterbury Park Holding's P/E.

NasdaqGM:CPHC Price Estimation Relative to Market, December 16th 2019

Its relatively low P/E ratio indicates that Canterbury Park Holding shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Canterbury Park Holding saw earnings per share decrease by 16% last year. But it has grown its earnings per share by 18% per year over the last five years. And EPS is down 1.7% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

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.

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 Canterbury Park Holding's Balance Sheet Tell Us?

Canterbury Park Holding's net debt is 0.5% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Canterbury Park Holding's P/E Ratio

Canterbury Park Holding trades on a P/E ratio of 12.6, which is below the US market average of 18.6. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. What can be absolutely certain is that the market has become less optimistic about Canterbury Park Holding over the last month, with the P/E ratio falling from 12.6 back then to 12.6 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.