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 31% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 8.2% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more 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 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.

See our latest analysis for Hibbett Sports

How Does Hibbett Sports's P/E Ratio Compare To Its Peers?

Hibbett Sports has a P/E ratio of 10.56. 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 Hibbett Sports's P/E.

Its P/E ratio suggests that Hibbett Sports shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Hibbett Sports actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Hibbett Sports saw earnings per share decrease by 7.5% last year. And over the longer term (5 years) earnings per share have decreased 11% annually. So it would be surprising to see a high P/E.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Hibbett Sports's P/E?

With net cash of US$69m, Hibbett Sports has a very strong balance sheet, which may be important for its business. Having said that, at 24% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Hibbett Sports's P/E Ratio

Hibbett Sports trades on a P/E ratio of 10.6, which is below the US market average of 14.7. The recent drop in earnings per share would make investors cautious, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation. What can be absolutely certain is that the market has become less optimistic about Hibbett Sports over the last month, with the P/E ratio falling from 15.4 back then to 10.6 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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.