XPEL (NASDAQ:XPEL) shares have continued recent momentum with a 33% gain in the last month alone. And the full year gain of 46% isn't too shabby, either!
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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
How Does XPEL's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 23.3 that there is some investor optimism about XPEL. The image below shows that XPEL has a higher P/E than the average (15.2) P/E for companies in the auto components industry.
Its relatively high P/E ratio indicates that XPEL shareholders think it will perform better than other companies in its industry classification.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, XPEL grew EPS like Taylor Swift grew her fan base back in 2010; the 163% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 39% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting XPEL's P/E?
The extra options and safety that comes with XPEL's US$2.7m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On XPEL's P/E Ratio
XPEL has a P/E of 23.3. That's higher than the average in its market, which is 17.3. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect XPEL to have a high P/E ratio. What we know for sure is that investors have become much more excited about XPEL recently, since they have pushed its P/E ratio from 17.6 to 23.3 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
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. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than XPEL. 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).
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.
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