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A Sliding Share Price Has Us Looking At At Home Group Inc.'s (NYSE:HOME) P/E Ratio

Simply Wall St

To the annoyance of some shareholders, At Home Group (NYSE:HOME) shares are down a considerable 30% in the last month. Given the 81% drop over the last year, some shareholders might be worried that they have become 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for At Home Group

How Does At Home Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 7.11 that sentiment around At Home Group isn't particularly high. If you look at the image below, you can see At Home Group has a lower P/E than the average (13.7) in the specialty retail industry classification.

NYSE:HOME Price Estimation Relative to Market, March 7th 2020
NYSE:HOME Price Estimation Relative to Market, March 7th 2020

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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

It's nice to see that At Home Group grew EPS by a stonking 31% in the last year. Unfortunately, earnings per share are down 23% a year, over 3 years.

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. That means it doesn't take debt or cash into account. 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.

How Does At Home Group's Debt Impact Its P/E Ratio?

At Home Group has net debt worth a very significant 226% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Verdict On At Home Group's P/E Ratio

At Home Group has a P/E of 7.1. That's below the average in the US market, which is 16.2. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given At Home Group's P/E ratio has declined from 10.2 to 7.1 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 to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors have an opportunity when market expectations about a stock are wrong. 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.

You might be able to find a better buy than At Home Group. 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.