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A Sliding Share Price Has Us Looking At Duluth Holdings Inc.'s (NASDAQ:DLTH) P/E Ratio

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Unfortunately for some shareholders, the Duluth Holdings (NASDAQ:DLTH) share price has dived 44% in the last thirty days. And that drop will have no doubt have some shareholders concerned that the 81% share price decline, over the last year, has turned them into bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.

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. One way to gauge market expectations of a stock 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 Duluth Holdings

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

We can tell from its P/E ratio of 7.48 that sentiment around Duluth Holdings isn't particularly high. If you look at the image below, you can see Duluth Holdings has a lower P/E than the average (21.0) in the online retail industry classification.

NasdaqGS:DLTH Price Estimation Relative to Market, March 24th 2020
NasdaqGS:DLTH Price Estimation Relative to Market, March 24th 2020

This suggests that market participants think Duluth Holdings will underperform other companies in its industry. Since the market seems unimpressed with Duluth Holdings, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Duluth Holdings's earnings per share fell by 19% in the last twelve months. And EPS is down 4.7% a year, over the last 3 years. This could justify a low P/E.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

How Does Duluth Holdings's Debt Impact Its P/E Ratio?

Duluth Holdings's net debt equates to 43% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Duluth Holdings's P/E Ratio

Duluth Holdings has a P/E of 7.5. That's below the average in the US market, which is 11.5. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Duluth Holdings's P/E ratio has declined from 13.4 to 7.5 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Duluth Holdings. 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).

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.