A Rising Share Price Has Us Looking Closely At Clearfield, Inc.’s (NASDAQ:CLFD) P/E Ratio

Those holding Clearfield (NASDAQ:CLFD) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 15% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 22% in the last 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.

Check out our latest analysis for Clearfield

How Does Clearfield’s P/E Ratio Compare To Its Peers?

Clearfield’s P/E of 39.71 indicates some degree of optimism towards the stock. As you can see below, Clearfield has a higher P/E than the average company (26.1) in the communications industry.

NasdaqGM:CLFD Price Estimation Relative to Market April 17th 2020
NasdaqGM:CLFD Price Estimation Relative to Market April 17th 2020

That means that the market expects Clearfield will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Clearfield saw earnings per share decrease by 6.9% last year. And over the longer term (5 years) earnings per share have decreased 2.8% annually. So you wouldn’t expect a very high P/E.

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

Don’t forget that the P/E ratio considers market capitalization. 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.

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.

Clearfield’s Balance Sheet

Clearfield has net cash of US$25m. This is fairly high at 15% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Clearfield’s P/E Ratio

Clearfield’s P/E is 39.7 which is way above average (13.2) in its market. The recent drop in earnings per share might keep value investors away, but the healthy balance sheet means the company retains the potential for future growth. If this growth fails to materialise, the current high P/E could prove to be temporary, as the share price falls. What is very clear is that the market has become significantly more optimistic about Clearfield over the last month, with the P/E ratio rising from 30.2 back then to 39.7 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is ‘blood in the streets’, then you may feel the opportunity has passed.

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 be able to find a better stock than Clearfield. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.