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Read This Before You Buy Hooker Furniture Corporation (NASDAQ:HOFT) Because Of Its P/E Ratio

Sebastian Eder

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Hooker Furniture Corporation’s (NASDAQ:HOFT) P/E ratio and reflect on what it tells us about the company’s share price. Hooker Furniture has a P/E ratio of 10.15, based on the last twelve months. That corresponds to an earnings yield of approximately 9.9%.

View our latest analysis for Hooker Furniture

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 Hooker Furniture:

P/E of 10.15 = $29.04 ÷ $2.86 (Based on the trailing twelve months to October 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Hooker Furniture saw earnings per share improve by -8.2% last year. And earnings per share have improved by 27% annually, over the last five years.

How Does Hooker Furniture’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Hooker Furniture has a lower P/E than the average (12.2) in the consumer durables industry classification.

NasdaqGS:HOFT PE PEG Gauge January 10th 19

Hooker Furniture’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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. 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).

Hooker Furniture’s Balance Sheet

Net debt totals just 2.5% of Hooker Furniture’s 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 Hooker Furniture’s P/E Ratio

Hooker Furniture has a P/E of 10.1. That’s below the average in the US market, which is 16.8. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue – or even increase – then the low P/E may signify opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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: Hooker Furniture 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.