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Why Clarus Corporation's (NASDAQ:CLAR) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St
·4 mins read

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Clarus Corporation's (NASDAQ:CLAR) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Clarus has a P/E ratio of 39.99. That means that at current prices, buyers pay $39.99 for every $1 in trailing yearly profits.

View our latest analysis for Clarus

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Clarus:

P/E of 39.99 = USD13.58 ÷ USD0.34 (Based on the year to September 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

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

The P/E ratio essentially measures market expectations of a company. The image below shows that Clarus has a higher P/E than the average (19.9) P/E for companies in the leisure industry.

NasdaqGS:CLAR Price Estimation Relative to Market, February 21st 2020
NasdaqGS:CLAR Price Estimation Relative to Market, February 21st 2020

Clarus's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Clarus increased earnings per share by 4.1% last year.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

Is Debt Impacting Clarus's P/E?

Clarus has net debt worth just 5.7% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On Clarus's P/E Ratio

Clarus's P/E is 40.0 which is above average (18.5) in its market. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future.

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 Clarus. 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.