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A Sliding Share Price Has Us Looking At Raven Industries, Inc.'s (NASDAQ:RAVN) P/E Ratio

Simply Wall St
·4 mins read

To the annoyance of some shareholders, Raven Industries (NASDAQ:RAVN) shares are down a considerable 30% in the last month. That drop has capped off a tough year for shareholders, with the share price down 43% in that time.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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. 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 Raven Industries

Does Raven Industries Have A Relatively High Or Low P/E For Its Industry?

Raven Industries's P/E of 22.54 indicates some degree of optimism towards the stock. As you can see below, Raven Industries has a higher P/E than the average company (16.9) in the industrials industry.

NasdaqGS:RAVN Price Estimation Relative to Market, March 13th 2020
NasdaqGS:RAVN Price Estimation Relative to Market, March 13th 2020

Its relatively high P/E ratio indicates that Raven Industries 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Raven Industries shrunk earnings per share by 39% over the last year. But EPS is up 26% over the last 3 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. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Raven Industries's Debt Impact Its P/E Ratio?

The extra options and safety that comes with Raven Industries's US$77m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Raven Industries's P/E Ratio

Raven Industries has a P/E of 22.5. That's higher than the average in its market, which is 13.3. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What can be absolutely certain is that the market has become significantly less optimistic about Raven Industries over the last month, with the P/E ratio falling from 32.2 back then to 22.5 today. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.