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A Rising Share Price Has Us Looking Closely At Matador Resources Company's (NYSE:MTDR) P/E Ratio

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Matador Resources (NYSE:MTDR) shares have had a really impressive month, gaining 31%, after some slippage. The full year gain of 13% is pretty reasonable, too.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Matador Resources

Does Matador Resources Have A Relatively High Or Low P/E For Its Industry?

Matador Resources has a P/E ratio of 10.44. You can see in the image below that the average P/E (11.0) for companies in the oil and gas industry is roughly the same as Matador Resources's P/E.

NYSE:MTDR Price Estimation Relative to Market, January 2nd 2020
NYSE:MTDR Price Estimation Relative to Market, January 2nd 2020

Matador Resources's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Matador Resources actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Matador Resources saw earnings per share improve by -9.0% last year. And its annual EPS growth rate over 5 years is 8.3%.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

So What Does Matador Resources's Balance Sheet Tell Us?

Net debt totals 71% of Matador Resources's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Matador Resources's P/E Ratio

Matador Resources has a P/E of 10.4. That's below the average in the US market, which is 18.9. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently. What we know for sure is that investors have become more excited about Matador Resources recently, since they have pushed its P/E ratio from 8.0 to 10.4 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Matador Resources. 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).

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.