Izu Shaboten ResortLtd (TYO:6819) shares have had a really impressive month, gaining 34%, after some slippage. But that gain wasn’t enough to make shareholders whole, as the share price is still down 9.0% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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.
See our latest analysis for Izu Shaboten ResortLtd
How Does Izu Shaboten ResortLtd’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 21.07 that sentiment around Izu Shaboten ResortLtd isn’t particularly high. The image below shows that Izu Shaboten ResortLtd has a lower P/E than the average (25.6) P/E for companies in the hospitality industry.
Izu Shaboten ResortLtd’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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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.
Izu Shaboten ResortLtd shrunk earnings per share by 61% over the last year. But it has grown its earnings per share by 31% per year over the last five years. And it has shrunk its earnings per share by 32% per year over the last three years. This might lead to low expectations.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
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 Izu Shaboten ResortLtd’s P/E?
Izu Shaboten ResortLtd has net cash of JP¥499m. This is fairly high at 16% 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 Izu Shaboten ResortLtd’s P/E Ratio
Izu Shaboten ResortLtd has a P/E of 21.1. That’s higher than the average in its market, which is 14.5. Falling earnings per share is probably keeping traditional 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 Izu Shaboten ResortLtd over the last month, with the P/E ratio rising from 15.8 back then to 21.1 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Izu Shaboten ResortLtd. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.