A Sliding Share Price Has Us Looking At National Vision Holdings, Inc.’s (NASDAQ:EYE) P/E Ratio

Unfortunately for some shareholders, the National Vision Holdings (NASDAQ:EYE) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 22% in the last year.

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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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 National Vision Holdings

How Does National Vision Holdings’s P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 55.72 that there is some investor optimism about National Vision Holdings. As you can see below, National Vision Holdings has a much higher P/E than the average company (9.1) in the specialty retail industry.

NasdaqGS:EYE Price Estimation Relative to Market, March 17th 2020
NasdaqGS:EYE Price Estimation Relative to Market, March 17th 2020

That means that the market expects National Vision Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. 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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

National Vision Holdings increased earnings per share by a whopping 31% last year. And earnings per share have improved by 21% annually, over the last three years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

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

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting National Vision Holdings’s P/E?

National Vision Holdings’s net debt equates to 27% of its market capitalization. While it’s worth keeping this in mind, it isn’t a worry.

The Bottom Line On National Vision Holdings’s P/E Ratio

National Vision Holdings’s P/E is 55.7 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So to be frank we are not surprised it has a high P/E ratio. Given National Vision Holdings’s P/E ratio has declined from 80.9 to 55.7 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 should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than National Vision Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.