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Do You Know What Chicago Rivet & Machine Co.'s (NYSEMKT:CVR) P/E Ratio Means?

Simply Wall St

Unfortunately for some shareholders, the Chicago Rivet & Machine (NYSEMKT:CVR) share price has dived in the last thirty days. Even longer term holders have taken a real hit with the stock declining 12% 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. One way to gauge market expectations of a stock 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.

Check out our latest analysis for Chicago Rivet & Machine

Does Chicago Rivet & Machine Have A Relatively High Or Low P/E For Its Industry?

Chicago Rivet & Machine's P/E is 21.71. You can see in the image below that the average P/E (21.8) for companies in the machinery industry is roughly the same as Chicago Rivet & Machine's P/E.

AMEX:CVR Price Estimation Relative to Market, February 13th 2020

Its P/E ratio suggests that Chicago Rivet & Machine shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Chicago Rivet & Machine shrunk earnings per share by 54% over the last year. And it has shrunk its earnings per share by 13% per year over the last five years. This might lead to muted expectations.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

Is Debt Impacting Chicago Rivet & Machine's P/E?

Chicago Rivet & Machine has net cash of US$7.3m. This is fairly high at 30% 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 Chicago Rivet & Machine's P/E Ratio

Chicago Rivet & Machine has a P/E of 21.7. That's higher than the average in its market, which is 18.5. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls. Given Chicago Rivet & Machine's P/E ratio has declined from 21.7 to 21.7 in the last month, we know for sure that the market is less confident about the business today, than it was back then. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Chicago Rivet & Machine 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.