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What Is U.S. Xpress Enterprises's (NYSE:USX) P/E Ratio After Its Share Price Rocketed?

Simply Wall St

U.S. Xpress Enterprises (NYSE:USX) shareholders are no doubt pleased to see that the share price has had a great month, posting a 40% gain, recovering from prior weakness. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 65% share price decline throughout the year.

Assuming no other changes, a sharply higher share price makes a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 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 U.S. Xpress Enterprises

How Does U.S. Xpress Enterprises's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 7.74 that sentiment around U.S. Xpress Enterprises isn't particularly high. The image below shows that U.S. Xpress Enterprises has a lower P/E than the average (17.5) P/E for companies in the transportation industry.

NYSE:USX Price Estimation Relative to Market, September 23rd 2019

Its relatively low P/E ratio indicates that U.S. Xpress Enterprises shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with U.S. Xpress Enterprises, it's quite possible it could surprise on the upside. 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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

U.S. Xpress Enterprises's earnings per share fell by 51% in the last twelve months.

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. 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 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.

How Does U.S. Xpress Enterprises's Debt Impact Its P/E Ratio?

U.S. Xpress Enterprises's net debt is considerable, at 181% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On U.S. Xpress Enterprises's P/E Ratio

U.S. Xpress Enterprises trades on a P/E ratio of 7.7, which is below the US market average of 17.9. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. What we know for sure is that investors are becoming less uncomfortable about U.S. Xpress Enterprises's prospects, since they have pushed its P/E ratio from 5.5 to 7.7 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than U.S. Xpress Enterprises. 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.