A Rising Share Price Has Us Looking Closely At Earthstone Energy, Inc.'s (NYSE:ESTE) P/E Ratio
Earthstone Energy (NYSE:ESTE) shares have continued recent momentum with a 34% gain in the last month alone. The full year gain of 16% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
Check out our latest analysis for Earthstone Energy
How Does Earthstone Energy's P/E Ratio Compare To Its Peers?
Earthstone Energy's P/E of 5.07 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Earthstone Energy has a lower P/E than the average (11.1) in the oil and gas industry classification.
This suggests that market participants think Earthstone Energy will underperform other companies in its industry. Since the market seems unimpressed with Earthstone Energy, 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Earthstone Energy's 344% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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 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.
So What Does Earthstone Energy's Balance Sheet Tell Us?
Net debt is 27% of Earthstone Energy's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Earthstone Energy's P/E Ratio
Earthstone Energy trades on a P/E ratio of 5.1, which is below the US market average of 18.7. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified. What we know for sure is that investors are becoming less uncomfortable about Earthstone Energy's prospects, since they have pushed its P/E ratio from 3.8 to 5.1 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
Investors have an opportunity when market expectations about a stock are wrong. 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
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