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How Does SPX FLOW's (NYSE:FLOW) P/E Compare To Its Industry, After Its Big Share Price Gain?

SPX FLOW (NYSE:FLOW) shareholders are no doubt pleased to see that the share price has had a great month, posting a 30% gain, recovering from prior weakness. And the full year gain of 15% isn't too shabby, either!

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. 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 SPX FLOW

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

We can tell from its P/E ratio of 56.25 that there is some investor optimism about SPX FLOW. As you can see below, SPX FLOW has a higher P/E than the average company (23.0) in the machinery industry.

NYSE:FLOW Price Estimation Relative to Market, November 6th 2019
NYSE:FLOW Price Estimation Relative to Market, November 6th 2019

SPX FLOW's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. 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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

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SPX FLOW saw earnings per share decrease by 58% last year. And it has shrunk its earnings per share by 24% per year over the last five years. This could justify a pessimistic P/E.

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. That means it doesn't take debt or cash into account. 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.

Is Debt Impacting SPX FLOW's P/E?

SPX FLOW has net debt equal to 26% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On SPX FLOW's P/E Ratio

With a P/E ratio of 56.2, SPX FLOW is expected to grow earnings very strongly in the years to come. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What is very clear is that the market has become significantly more optimistic about SPX FLOW over the last month, with the P/E ratio rising from 43.3 back then to 56.2 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.

You might be able to find a better buy than SPX FLOW. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.

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. Thank you for reading.