Yahoo Finance How Does Sleep Country Canada Holdings's (TSE:ZZZ) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Sleep Country Canada Holdings (TSE:ZZZ) shares are down a considerable 55% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 53% drop over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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, 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Sleep Country Canada Holdings
Does Sleep Country Canada Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 6.28 that sentiment around Sleep Country Canada Holdings isn't particularly high. We can see in the image below that the average P/E (9.2) for companies in the specialty retail industry is higher than Sleep Country Canada Holdings's P/E.
This suggests that market participants think Sleep Country Canada Holdings will underperform other companies in its industry. Since the market seems unimpressed with Sleep Country Canada Holdings, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Sleep Country Canada Holdings saw earnings per share decrease by 7.1% last year. But EPS is up 4.3% over the last 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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).
Is Debt Impacting Sleep Country Canada Holdings's P/E?
Net debt is 38% of Sleep Country Canada Holdings's market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Sleep Country Canada Holdings's P/E Ratio
Sleep Country Canada Holdings trades on a P/E ratio of 6.3, which is below the CA market average of 9.9. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. Given Sleep Country Canada Holdings's P/E ratio has declined from 13.9 to 6.3 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 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 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 Sleep Country Canada Holdings. 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.
