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# Here’s How P/E Ratios Can Help Us Understand Hallador Energy Company (NASDAQ:HNRG)

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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 Hallador Energy Company’s (NASDAQ:HNRG) P/E ratio to inform your assessment of the investment opportunity. Hallador Energy has a price to earnings ratio of 6.63, based on the last twelve months. In other words, at today’s prices, investors are paying \$6.63 for every \$1 in prior year profit.

### How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

P/E of 6.63 = \$5.68 ÷ \$0.86 (Based on the year to September 2018.)

### Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each \$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

### How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Hallador Energy increased earnings per share by a whopping 234% last year. And its annual EPS growth rate over 5 years is 4.5%. I’d therefore be a little surprised if its P/E ratio was not relatively high.

### How Does Hallador Energy’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Hallador Energy has a lower P/E than the average (12.7) in the oil and gas industry classification.

Hallador Energy’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

### 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. 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 taking on debt (or spending its remaining 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).

Hallador Energy has net debt worth 98% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

### The Bottom Line On Hallador Energy’s P/E Ratio

Hallador Energy trades on a P/E ratio of 6.6, which is below the US market average of 17.5. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Hallador Energy 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.