Yahoo Finance What Is KAR Auction Services's (NYSE:KAR) P/E Ratio After Its Share Price Rocketed?
Those holding KAR Auction Services (NYSE:KAR) shares must be pleased that the share price has rebounded 36% in the last thirty days. But unfortunately, the stock is still down by 29% over a quarter. But that will do little to salve the savage burn caused by the 74% 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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). 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.
Check out our latest analysis for KAR Auction Services
Does KAR Auction Services Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 21.34 that sentiment around KAR Auction Services isn't particularly high. The image below shows that KAR Auction Services has a lower P/E than the average (23.9) P/E for companies in the commercial services industry.
KAR Auction Services's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with KAR Auction Services, 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
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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
KAR Auction Services's earnings per share fell by 20% in the last twelve months. And EPS is down 10% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
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. That means it doesn't take debt or cash into account. 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.
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 KAR Auction Services's Debt Impact Its P/E Ratio?
KAR Auction Services has net debt worth a very significant 147% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Verdict On KAR Auction Services's P/E Ratio
KAR Auction Services's P/E is 21.3 which is above average (14.9) in its market. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What is very clear is that the market has become significantly more optimistic about KAR Auction Services over the last month, with the P/E ratio rising from 15.7 back then to 21.3 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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 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.
