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What Is Quickstep Holdings's (ASX:QHL) P/E Ratio After Its Share Price Rocketed?

Simply Wall St
·4 mins read

Quickstep Holdings (ASX:QHL) shareholders are no doubt pleased to see that the share price has bounced 52% in the last month alone, although it is still down 19% over the last quarter. And the full year gain of 18% isn't too shabby, either!

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). 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). 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 Quickstep Holdings

Does Quickstep Holdings Have A Relatively High Or Low P/E For Its Industry?

Quickstep Holdings's P/E of 22.88 indicates some degree of optimism towards the stock. As you can see below, Quickstep Holdings has a higher P/E than the average company (18.6) in the aerospace & defense industry.

ASX:QHL Price Estimation Relative to Market May 22nd 2020
ASX:QHL Price Estimation Relative to Market May 22nd 2020

Its relatively high P/E ratio indicates that Quickstep Holdings shareholders think it will perform better than other companies in its industry classification. 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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Quickstep Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 186% gain was both fast and well deserved.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Is Debt Impacting Quickstep Holdings's P/E?

Quickstep Holdings's net debt is 8.5% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On Quickstep Holdings's P/E Ratio

Quickstep Holdings has a P/E of 22.9. That's higher than the average in its market, which is 14.9. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable. What is very clear is that the market has become significantly more optimistic about Quickstep Holdings over the last month, with the P/E ratio rising from 15.0 back then to 22.9 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 have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Quickstep Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.