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A Sliding Share Price Has Us Looking At Applied Industrial Technologies, Inc.'s (NYSE:AIT) P/E Ratio

Simply Wall St
·4 mins read

To the annoyance of some shareholders, Applied Industrial Technologies (NYSE:AIT) shares are down a considerable 31% in the last month. The recent drop has obliterated the annual return, with the share price now down 18% over that longer period.

All else being equal, a share price drop should make a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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.

View our latest analysis for Applied Industrial Technologies

How Does Applied Industrial Technologies's P/E Ratio Compare To Its Peers?

Applied Industrial Technologies has a P/E ratio of 13.80. You can see in the image below that the average P/E (13.1) for companies in the trade distributors industry is roughly the same as Applied Industrial Technologies's P/E.

NYSE:AIT Price Estimation Relative to Market, March 12th 2020
NYSE:AIT Price Estimation Relative to Market, March 12th 2020

Its P/E ratio suggests that Applied Industrial Technologies shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Applied Industrial Technologies shrunk earnings per share by 19% over the last year. But it has grown its earnings per share by 3.8% per year over the last five years.

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

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

Is Debt Impacting Applied Industrial Technologies's P/E?

Applied Industrial Technologies's net debt equates to 45% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Applied Industrial Technologies's P/E Ratio

Applied Industrial Technologies trades on a P/E ratio of 13.8, which is fairly close to the US market average of 14.7. When you consider the lack of EPS growth last year (along with some debt), it seems the market is optimistic about the future for the business. What can be absolutely certain is that the market has become significantly less optimistic about Applied Industrial Technologies over the last month, with the P/E ratio falling from 20.0 back then to 13.8 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.