Does Hooker Furniture Corporation’s (NASDAQ:HOFT) P/E Ratio Signal A Buying Opportunity?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Hooker Furniture Corporation’s (NASDAQ:HOFT), to help you decide if the stock is worth further research. Based on the last twelve months, Hooker Furniture’s P/E ratio is 8.97. In other words, at today’s prices, investors are paying $8.97 for every $1 in prior year profit.

View our latest analysis for Hooker Furniture

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Hooker Furniture:

P/E of 8.97 = $30.34 ÷ $3.38 (Based on the trailing twelve months to February 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Hooker Furniture increased earnings per share by a whopping 39% last year. And it has bolstered its earnings per share by 36% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

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

The P/E ratio essentially measures market expectations of a company. The image below shows that Hooker Furniture has a lower P/E than the average (13.7) P/E for companies in the consumer durables industry.

NasdaqGS:HOFT Price Estimation Relative to Market, May 8th 2019
NasdaqGS:HOFT Price Estimation Relative to Market, May 8th 2019

This suggests that market participants think Hooker Furniture will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

How Does Hooker Furniture’s Debt Impact Its P/E Ratio?

Net debt totals just 6.7% of Hooker Furniture’s market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Hooker Furniture’s P/E Ratio

Hooker Furniture has a P/E of 9. That’s below the average in the US market, which is 18.2. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Hooker Furniture. So you may wish to see this free collection of other companies that have grown earnings strongly.

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 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. Thank you for reading.