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A Rising Share Price Has Us Looking Closely At Hibbett Sports, Inc.'s (NASDAQ:HIBB) P/E Ratio

Simply Wall St

Hibbett Sports (NASDAQ:HIBB) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month alone, although it is still down 35% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 22% in the last year.

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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Hibbett Sports

How Does Hibbett Sports's P/E Ratio Compare To Its Peers?

Hibbett Sports's P/E is 9.79. As you can see below Hibbett Sports has a P/E ratio that is fairly close for the average for the specialty retail industry, which is 9.5.

NasdaqGS:HIBB Price Estimation Relative to Market May 16th 2020

That indicates that the market expects Hibbett Sports will perform roughly in line with other companies in its industry. So if Hibbett Sports 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

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Hibbett Sports maintained roughly steady earnings over the last twelve months. And EPS is down 12% a year, over the last 5 years. So you wouldn't expect a very high P/E.

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

So What Does Hibbett Sports's Balance Sheet Tell Us?

With net cash of US$66m, Hibbett Sports has a very strong balance sheet, which may be important for its business. Having said that, at 27% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Hibbett Sports's P/E Ratio

Hibbett Sports trades on a P/E ratio of 9.8, which is below the US market average of 14.3. Recent earnings growth wasn't bad. Also positive, the relatively strong balance sheet will allow for investment in growth. In contrast, the P/E indicates shareholders doubt that will happen! What we know for sure is that investors are becoming less uncomfortable about Hibbett Sports's prospects, since they have pushed its P/E ratio from 7.5 to 9.8 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

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

But note: Hibbett Sports 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).

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.