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What Is Mohawk Industries's (NYSE:MHK) P/E Ratio After Its Share Price Tanked?

Unfortunately for some shareholders, the Mohawk Industries (NYSE:MHK) share price has dived 30% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 26% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

Check out our latest analysis for Mohawk Industries

How Does Mohawk Industries's P/E Ratio Compare To Its Peers?

Mohawk Industries's P/E of 9.33 indicates some degree of optimism towards the stock. As you can see below, Mohawk Industries has a higher P/E than the average company (8.3) in the consumer durables industry.

NYSE:MHK Price Estimation Relative to Market, March 16th 2020
NYSE:MHK Price Estimation Relative to Market, March 16th 2020

That means that the market expects Mohawk Industries will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

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Mohawk Industries's earnings per share fell by 10% in the last twelve months. But EPS is up 7.2% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 6.3% annually. This might lead to low expectations.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

So What Does Mohawk Industries's Balance Sheet Tell Us?

Mohawk Industries's net debt equates to 35% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Mohawk Industries's P/E Ratio

Mohawk Industries trades on a P/E ratio of 9.3, which is below the US market average of 14.0. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Mohawk Industries's P/E ratio has declined from 13.3 to 9.3 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 should be looking to buy stocks that the market is wrong about. 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.

Of course you might be able to find a better stock than Mohawk Industries. 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.