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A Rising Share Price Has Us Looking Closely At ZAGG Inc's (NASDAQ:ZAGG) P/E Ratio

Simply Wall St

The ZAGG (NASDAQ:ZAGG) share price has done well in the last month, posting a gain of 31%. But shareholders may not all be feeling jubilant, since the share price is still down 36% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

View our latest analysis for ZAGG

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

We can tell from its P/E ratio of 24.08 that there is some investor optimism about ZAGG. The image below shows that ZAGG has a higher P/E than the average (12.8) P/E for companies in the consumer durables industry.

NasdaqGS:ZAGG Price Estimation Relative to Market, November 5th 2019

Its relatively high P/E ratio indicates that ZAGG shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. 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.

ZAGG saw earnings per share decrease by 68% last year. But over the longer term (5 years) earnings per share have increased by 28%.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

ZAGG's Balance Sheet

ZAGG has net debt equal to 36% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On ZAGG's P/E Ratio

ZAGG trades on a P/E ratio of 24.1, which is above its market average of 18.2. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What we know for sure is that investors have become much more excited about ZAGG recently, since they have pushed its P/E ratio from 18.4 to 24.1 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than ZAGG. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.