Yahoo Finance What Is Southwestern Energy's (NYSE:SWN) P/E Ratio After Its Share Price Rocketed?
Those holding Southwestern Energy (NYSE:SWN) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 27% over a quarter. But that will do little to salve the savage burn caused by the 64% share price decline, over the last year.
All else being equal, a sharp share price increase should make a stock less 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
Check out our latest analysis for Southwestern Energy
Does Southwestern Energy Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 1.03 that sentiment around Southwestern Energy isn't particularly high. If you look at the image below, you can see Southwestern Energy has a lower P/E than the average (7.0) in the oil and gas industry classification.
This suggests that market participants think Southwestern Energy will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
In the last year, Southwestern Energy grew EPS like Taylor Swift grew her fan base back in 2010; the 77% gain was both fast and well deserved. Unfortunately, earnings per share are down 8.9% a year, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
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 Southwestern Energy's Debt Impact Its P/E Ratio?
Southwestern Energy has net debt worth a very significant 244% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Southwestern Energy's P/E Ratio
Southwestern Energy trades on a P/E ratio of 1.0, which is below the US market average of 12.5. 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. What is very clear is that the market has become less pessimistic about Southwestern Energy over the last month, with the P/E ratio rising from 0.8 back then to 1.0 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Southwestern Energy may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
