Yahoo Finance A Sliding Share Price Has Us Looking At Clean Harbors, Inc.'s (NYSE:CLH) P/E Ratio
Unfortunately for some shareholders, the Clean Harbors (NYSE:CLH) share price has dived 55% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 45% in that time.
Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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.
See our latest analysis for Clean Harbors
Does Clean Harbors Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 22.67 that there is some investor optimism about Clean Harbors. You can see in the image below that the average P/E (17.8) for companies in the commercial services industry is lower than Clean Harbors's P/E.
Clean Harbors's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Clean Harbors increased earnings per share by a whopping 50% last year.
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. 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.
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.
How Does Clean Harbors's Debt Impact Its P/E Ratio?
Clean Harbors has net debt equal to 49% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Clean Harbors's P/E Ratio
Clean Harbors trades on a P/E ratio of 22.7, which is above its market average of 11.5. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable. Given Clean Harbors's P/E ratio has declined from 50.0 to 22.7 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Clean Harbors 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.
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