What Is Park-Ohio Holdings's (NASDAQ:PKOH) P/E Ratio After Its Share Price Tanked?
To the annoyance of some shareholders, Park-Ohio Holdings (NASDAQ:PKOH) shares are down a considerable 47% in the last month. That drop has capped off a tough year for shareholders, with the share price down 52% in that time.
Assuming nothing else has changed, a lower share price makes a stock more 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for Park-Ohio Holdings
How Does Park-Ohio Holdings's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 4.82 that sentiment around Park-Ohio Holdings isn't particularly high. If you look at the image below, you can see Park-Ohio Holdings has a lower P/E than the average (13.8) in the machinery industry classification.
Park-Ohio Holdings'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. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Park-Ohio Holdings's earnings per share fell by 28% in the last twelve months. But it has grown its earnings per share by 6.5% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 3.5% annually. This growth rate might warrant a below average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Park-Ohio Holdings's Balance Sheet
Net debt totals a substantial 264% of Park-Ohio Holdings's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On Park-Ohio Holdings's P/E Ratio
Park-Ohio Holdings has a P/E of 4.8. That's below the average in the US market, which is 12.4. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. What can be absolutely certain is that the market has become more pessimistic about Park-Ohio Holdings over the last month, with the P/E ratio falling from 9.1 back then to 4.8 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Park-Ohio Holdings 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.
