SeaLink Travel Group (ASX:SLK) shares have continued recent momentum with a 30% gain in the last month alone. The full year gain of 20% 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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.
Does SeaLink Travel Group Have A Relatively High Or Low P/E For Its Industry?
SeaLink Travel Group's P/E is 24.01. You can see in the image below that the average P/E (24.3) for companies in the hospitality industry is roughly the same as SeaLink Travel Group's P/E.
Its P/E ratio suggests that SeaLink Travel Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if SeaLink Travel Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
SeaLink Travel Group saw earnings per share improve by -9.8% last year. And its annual EPS growth rate over 5 years is 14%. Unfortunately, earnings per share are down 3.5% a year, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
SeaLink Travel Group's Balance Sheet
Net debt totals 11% of SeaLink Travel Group's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Verdict On SeaLink Travel Group's P/E Ratio
SeaLink Travel Group has a P/E of 24.0. That's higher than the average in its market, which is 18.5. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future. What we know for sure is that investors have become much more excited about SeaLink Travel Group recently, since they have pushed its P/E ratio from 18.4 to 24.0 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. 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 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 SeaLink Travel Group. 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).
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If you spot an error that warrants correction, please contact the editor at email@example.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.