Unfortunately for some shareholders, the Warrior Met Coal (NYSE:HCC) share price has dived 44% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 60% drop over twelve months.
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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Warrior Met Coal's P/E Ratio Compare To Its Peers?
Warrior Met Coal's P/E of 1.96 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Warrior Met Coal has a lower P/E than the average (8.0) in the metals and mining industry classification.
This suggests that market participants think Warrior Met Coal will underperform other companies in its industry. Since the market seems unimpressed with Warrior Met Coal, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Warrior Met Coal's earnings per share fell by 55% in the last twelve months.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Warrior Met Coal's Balance Sheet
Warrior Met Coal's net debt is 22% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On Warrior Met Coal's P/E Ratio
Warrior Met Coal trades on a P/E ratio of 2.0, which is below the US market average of 13.3. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Warrior Met Coal's P/E ratio has declined from 3.5 to 2.0 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 the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
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 email@example.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.
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