How Does Hibbett Sports's (NASDAQ:HIBB) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Hibbett Sports (NASDAQ:HIBB) share price has dived 51% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 53% in that time.

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. 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 Hibbett Sports

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

We can tell from its P/E ratio of 6.80 that sentiment around Hibbett Sports isn't particularly high. If you look at the image below, you can see Hibbett Sports has a lower P/E than the average (9.0) in the specialty retail industry classification.

Hibbett Sports's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Hibbett Sports maintained roughly steady earnings over the last twelve months. And over the longer term (5 years) earnings per share have decreased 12% annually. So you wouldn't expect a very high P/E.

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. That means it doesn't take debt or cash into account. 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).

Is Debt Impacting Hibbett Sports's P/E?

Hibbett Sports has net cash of US$66m. This is fairly high at 36% 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 Verdict On Hibbett Sports's P/E Ratio

Hibbett Sports trades on a P/E ratio of 6.8, which is below the US market average of 12.6. Recent earnings growth wasn't bad. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. What can be absolutely certain is that the market has become more pessimistic about Hibbett Sports over the last month, with the P/E ratio falling from 13.9 back then to 6.8 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Hibbett Sports 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.