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Unfortunately for some shareholders, the Nick Scali (ASX:NCK) share price has dived 33% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 9.0% over that longer period.
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. One way to gauge market expectations of a stock 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 Nick Scali
How Does Nick Scali's P/E Ratio Compare To Its Peers?
Nick Scali has a P/E ratio of 11.23. You can see in the image below that the average P/E (11.2) for companies in the specialty retail industry is roughly the same as Nick Scali's P/E.
Its P/E ratio suggests that Nick Scali shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Nick Scali actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Nick Scali's earnings per share fell by 11% in the last twelve months. But it has grown its earnings per share by 18% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.