A Rising Share Price Has Us Looking Closely At WW International, Inc.'s (NASDAQ:WW) P/E Ratio
Those holding WW International (NASDAQ:WW) shares must be pleased that the share price has rebounded 54% in the last thirty days. But unfortunately, the stock is still down by 21% over a quarter. And the full year gain of 28% isn't too shabby, either!
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. 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). 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 WW International
How Does WW International's P/E Ratio Compare To Its Peers?
WW International's P/E of 14.12 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (23.5) for companies in the consumer services industry is higher than WW International's P/E.
Its relatively low P/E ratio indicates that WW International shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with WW International, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
WW International's earnings per share fell by 29% in the last twelve months. But EPS is up 2.9% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does WW International's Debt Impact Its P/E Ratio?
WW International has net debt worth 80% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On WW International's P/E Ratio
WW International trades on a P/E ratio of 14.1, which is fairly close to the US market average of 14.9. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business. What we know for sure is that investors have become more excited about WW International recently, since they have pushed its P/E ratio from 9.2 to 14.1 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 have an opportunity when market expectations about a stock are wrong. 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 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 WW International. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
