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A Rising Share Price Has Us Looking Closely At P.A.M. Transportation Services, Inc.'s (NASDAQ:PTSI) P/E Ratio

Simply Wall St

Those holding P.A.M. Transportation Services (NASDAQ:PTSI) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 25% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 21% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). 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.

View our latest analysis for P.A.M. Transportation Services

Does P.A.M. Transportation Services Have A Relatively High Or Low P/E For Its Industry?

P.A.M. Transportation Services's P/E of 31.40 indicates some degree of optimism towards the stock. The image below shows that P.A.M. Transportation Services has a higher P/E than the average (18.5) P/E for companies in the transportation industry.

NasdaqGM:PTSI Price Estimation Relative to Market April 10th 2020

That means that the market expects P.A.M. Transportation Services will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

P.A.M. Transportation Services shrunk earnings per share by 66% over the last year. And EPS is down 4.3% a year, over the last 5 years. This might lead to muted expectations.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

P.A.M. Transportation Services's Balance Sheet

Net debt totals 90% of P.A.M. Transportation Services's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On P.A.M. Transportation Services's P/E Ratio

P.A.M. Transportation Services has a P/E of 31.4. That's higher than the average in its market, which is 13.6. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What we know for sure is that investors have become much more excited about P.A.M. Transportation Services recently, since they have pushed its P/E ratio from 23.8 to 31.4 over the last month. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 P.A.M. Transportation Services. 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.