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Do You Know What P.A.M. Transportation Services, Inc.'s (NASDAQ:PTSI) P/E Ratio Means?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use P.A.M. Transportation Services, Inc.'s (NASDAQ:PTSI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, P.A.M. Transportation Services's P/E ratio is 10.03. That means that at current prices, buyers pay $10.03 for every $1 in trailing yearly profits.

Check out our latest analysis for P.A.M. Transportation Services

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for P.A.M. Transportation Services:

P/E of 10.03 = $54.51 ÷ $5.44 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

Does P.A.M. Transportation Services Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (17.1) for companies in the transportation industry is higher than P.A.M. Transportation Services's P/E.

NasdaqGM:PTSI Price Estimation Relative to Market, July 25th 2019
NasdaqGM:PTSI Price Estimation Relative to Market, July 25th 2019

P.A.M. Transportation Services's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

P.A.M. Transportation Services shrunk earnings per share by 23% over the last year. But EPS is up 35% over the last 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

P.A.M. Transportation Services's Balance Sheet

P.A.M. Transportation Services has net debt worth 57% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On P.A.M. Transportation Services's P/E Ratio

P.A.M. Transportation Services's P/E is 10 which is below average (18.1) in the US market. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: P.A.M. Transportation Services 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).

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.

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. Thank you for reading.

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