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To the annoyance of some shareholders, World Fuel Services (NYSE:INT) shares are down a considerable 42% in the last month. Even longer term holders have taken a real hit with the stock declining 24% in the last year.
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). 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does World Fuel Services Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 8.38 that there is some investor optimism about World Fuel Services. As you can see below, World Fuel Services has a higher P/E than the average company (7.5) in the oil and gas industry.
Its relatively high P/E ratio indicates that World Fuel Services shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's nice to see that World Fuel Services grew EPS by a stonking 43% in the last year. And it has improved its earnings per share by 14% per year over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high. But earnings per share are down 3.1% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
World Fuel Services's Balance Sheet
World Fuel Services has net debt equal to 29% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On World Fuel Services's P/E Ratio
World Fuel Services trades on a P/E ratio of 8.4, which is below the US market average of 15.1. The company hasn't stretched its balance sheet, and earnings growth was good last year. 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 World Fuel Services over the last month, with the P/E ratio falling from 14.5 back then to 8.4 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: World Fuel Services may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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