Yahoo Finance A Rising Share Price Has Us Looking Closely At Ruth's Hospitality Group, Inc.'s (NASDAQ:RUTH) P/E Ratio
Ruth's Hospitality Group (NASDAQ:RUTH) shareholders are no doubt pleased to see that the share price has had a great month, posting a 34% gain, recovering from prior weakness. But that gain wasn't enough to make shareholders whole, as the share price is still down 8.5% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
View our latest analysis for Ruth's Hospitality Group
How Does Ruth's Hospitality Group's P/E Ratio Compare To Its Peers?
Ruth's Hospitality Group's P/E of 17.33 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Ruth's Hospitality Group has a lower P/E than the average (21.7) in the hospitality industry classification.
Its relatively low P/E ratio indicates that Ruth's Hospitality Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
It's great to see that Ruth's Hospitality Group grew EPS by 19% in the last year. And its annual EPS growth rate over 5 years is 18%. This could arguably justify a relatively high P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Ruth's Hospitality Group's Balance Sheet
Ruth's Hospitality Group has net debt worth 11% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Ruth's Hospitality Group's P/E Ratio
Ruth's Hospitality Group's P/E is 17.3 which is about average (18.3) in the US market. With only modest debt levels, and strong earnings growth, the market seems to doubt that the growth can be maintained. What is very clear is that the market has become more optimistic about Ruth's Hospitality Group over the last month, with the P/E ratio rising from 13.0 back then to 17.3 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 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.
Of course you might be able to find a better stock than Ruth's Hospitality Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
