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A Sliding Share Price Has Us Looking At Ruth's Hospitality Group, Inc.'s (NASDAQ:RUTH) P/E Ratio

Unfortunately for some shareholders, the Ruth's Hospitality Group (NASDAQ:RUTH) share price has dived 30% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 44% in that time.

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. 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 Ruth's Hospitality Group

Does Ruth's Hospitality Group Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 9.86 that sentiment around Ruth's Hospitality Group isn't particularly high. We can see in the image below that the average P/E (16.1) for companies in the hospitality industry is higher than Ruth's Hospitality Group's P/E.

NasdaqGS:RUTH Price Estimation Relative to Market, March 10th 2020
NasdaqGS:RUTH Price Estimation Relative to Market, March 10th 2020

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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

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Ruth's Hospitality Group increased earnings per share by 3.9% last year. And its annual EPS growth rate over 5 years is 14%.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. 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.

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.

Ruth's Hospitality Group's Balance Sheet

Ruth's Hospitality Group's net debt is 14% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On Ruth's Hospitality Group's P/E Ratio

Ruth's Hospitality Group's P/E is 9.9 which is below average (15.1) in the US market. The company does have a little debt, and EPS is moving in the right direction. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. Given Ruth's Hospitality Group's P/E ratio has declined from 14.1 to 9.9 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 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.

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.