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Par Pacific Holdings (NYSE:PARR) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 53% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 51% share price decline throughout the year.
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. One way to gauge market expectations of a stock 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.
How Does Par Pacific Holdings's P/E Ratio Compare To Its Peers?
Par Pacific Holdings's P/E of 11.87 indicates some degree of optimism towards the stock. As you can see below, Par Pacific Holdings has a higher P/E than the average company (9.9) in the oil and gas industry.
Par Pacific Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Par Pacific Holdings saw earnings per share decrease by 5.7% last year.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Par Pacific Holdings's Balance Sheet Tell Us?
Par Pacific Holdings's net debt is 96% of its market cap. 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 Verdict On Par Pacific Holdings's P/E Ratio
Par Pacific Holdings's P/E is 11.9 which is below average (14.9) in the US market. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. What is very clear is that the market has become more optimistic about Par Pacific Holdings over the last month, with the P/E ratio rising from 8.9 back then to 11.9 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Par Pacific Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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