How Does Cimarex Energy's (NYSE:XEC) P/E Compare To Its Industry, After Its Big Share Price Gain?

Cimarex Energy (NYSE:XEC) shares have had a really impressive month, gaining 31%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 41% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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.

See our latest analysis for Cimarex Energy

How Does Cimarex Energy's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 8.75 that sentiment around Cimarex Energy isn't particularly high. We can see in the image below that the average P/E (10.5) for companies in the oil and gas industry is higher than Cimarex Energy's P/E.

Cimarex Energy's P/E tells us that market participants think it will not fare as well as its peers in the same industry.

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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Cimarex Energy shrunk earnings per share by 1.5% last year. And it has shrunk its earnings per share by 3.2% per year over the last five years. So we might expect a relatively low P/E. So if Cimarex Energy grows EPS going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

So What Does Cimarex Energy's Balance Sheet Tell Us?

Cimarex Energy has net debt equal to 37% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Cimarex Energy's P/E Ratio

Cimarex Energy has a P/E of 8.7. That's below the average in the US market, which is 18.2. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. What we know for sure is that investors are becoming less uncomfortable about Cimarex Energy's prospects, since they have pushed its P/E ratio from 6.7 to 8.7 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors have an opportunity when market expectations about a stock are wrong. 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 Cimarex Energy. 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.