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A Sliding Share Price Has Us Looking At Vail Resorts, Inc.'s (NYSE:MTN) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Vail Resorts (NYSE:MTN) share price has dived 36% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 27% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Vail Resorts

Does Vail Resorts Have A Relatively High Or Low P/E For Its Industry?

Vail Resorts's P/E of 20.73 indicates some degree of optimism towards the stock. The image below shows that Vail Resorts has a higher P/E than the average (15.6) P/E for companies in the hospitality industry.

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

Vail Resorts's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's great to see that Vail Resorts grew EPS by 12% in the last year. And its annual EPS growth rate over 5 years is 24%. So one might expect an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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 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 Vail Resorts's Debt Impact Its P/E Ratio?

Vail Resorts's net debt equates to 25% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Vail Resorts's P/E Ratio

Vail Resorts's P/E is 20.7 which is above average (14.7) in its market. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. Therefore, it's not particularly surprising that it has a above average P/E ratio. Given Vail Resorts's P/E ratio has declined from 32.6 to 20.7 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. 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.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Vail Resorts. 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.