U.S. Markets closed

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

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. 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. Looking at earnings over the last twelve months, Hooker Furniture has a P/E ratio of 7. That means that at current prices, buyers pay $7 for every $1 in trailing yearly profits.

See our latest analysis for Hooker Furniture

How Do You Calculate A P/E 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 7 = $20.62 ÷ $2.94 (Based on the trailing twelve months to May 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Hooker Furniture increased earnings per share by an impressive 12% over the last twelve months. And earnings per share have improved by 30% annually, over the last five years. So one might expect an above average P/E ratio.

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

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Hooker Furniture has a lower P/E than the average (14) in the consumer durables industry classification.

NasdaqGS:HOFT Price Estimation Relative to Market, July 1st 2019

This suggests that market participants think Hooker Furniture will underperform other companies in its industry. Since the market seems unimpressed with Hooker Furniture, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

Hooker Furniture's Balance Sheet

Hooker Furniture's net debt is 2.4% 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 Bottom Line On Hooker Furniture's P/E Ratio

Hooker Furniture trades on a P/E ratio of 7, which is below the US market average of 18.1. The company hasn't stretched its balance sheet, and earnings growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors have an opportunity when market expectations about a stock are wrong. 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.

You might be able to find a better buy than Hooker Furniture. 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).

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.

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. Thank you for reading.