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A Sliding Share Price Has Us Looking At Comstock Resources, Inc.'s (NYSE:CRK) P/E Ratio

Simply Wall St
·4 mins read

To the annoyance of some shareholders, Comstock Resources (NYSE:CRK) shares are down a considerable 33% in the last month. The recent drop has obliterated the annual return, with the share price now down 17% over that longer period.

All else being equal, a share price drop should make a stock more 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

Check out our latest analysis for Comstock Resources

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

We can tell from its P/E ratio of 8.41 that sentiment around Comstock Resources isn't particularly high. If you look at the image below, you can see Comstock Resources has a lower P/E than the average (9.4) in the oil and gas industry classification.

NYSE:CRK Price Estimation Relative to Market May 17th 2020
NYSE:CRK Price Estimation Relative to Market May 17th 2020

Its relatively low P/E ratio indicates that Comstock Resources shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Comstock Resources, 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

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

Notably, Comstock Resources grew EPS by a whopping 48% in the last year.

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. 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.

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.

Is Debt Impacting Comstock Resources's P/E?

Comstock Resources has net debt worth a very significant 232% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On Comstock Resources's P/E Ratio

Comstock Resources's P/E is 8.4 which is below average (14.3) in the US market. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What can be absolutely certain is that the market has become more pessimistic about Comstock Resources over the last month, with the P/E ratio falling from 12.6 back then to 8.4 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. 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 be able to find a better stock than Comstock Resources. 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.