Despite Its High P/E Ratio, Is Outdoorzy S.A. (WSE:OUT) Still Undervalued?

Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we’ll show how Outdoorzy S.A.’s (WSE:OUT) P/E ratio could help you assess the value on offer. What is Outdoorzy’s P/E ratio? Well, based on the last twelve months it is 17.92. That is equivalent to an earnings yield of about 5.6%.

See our latest analysis for Outdoorzy

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Outdoorzy:

P/E of 17.92 = PLN0.62 ÷ PLN0.03 (Based on the trailing twelve months to July 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each PLN1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Outdoorzy Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Outdoorzy has a higher P/E than the average company (14.0) in the online retail industry.

WSE:OUT Price Estimation Relative to Market, January 13th 2020
WSE:OUT Price Estimation Relative to Market, January 13th 2020

Its relatively high P/E ratio indicates that Outdoorzy shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Outdoorzy’s 206% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.

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

Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

Outdoorzy’s Balance Sheet

The extra options and safety that comes with Outdoorzy’s zł222k net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Outdoorzy’s P/E Ratio

Outdoorzy has a P/E of 17.9. That’s higher than the average in its market, which is 11.4. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Outdoorzy may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.