Advanced Emissions Solutions (NASDAQ:ADES) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 40% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 37% 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). 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Advanced Emissions Solutions’s P/E Ratio Compare To Its Peers?
Advanced Emissions Solutions’s P/E of 3.61 indicates relatively low sentiment towards the stock. The image below shows that Advanced Emissions Solutions has a lower P/E than the average (16.3) P/E for companies in the chemicals industry.
Its relatively low P/E ratio indicates that Advanced Emissions Solutions shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or 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. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
It’s great to see that Advanced Emissions Solutions grew EPS by 10% in the last year. And its annual EPS growth rate over 5 years is 98%. So one might expect an above average P/E ratio. In contrast, EPS has decreased by 24%, annually, over 3 years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Advanced Emissions Solutions’s Balance Sheet
Advanced Emissions Solutions’s net debt is 20% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On Advanced Emissions Solutions’s P/E Ratio
Advanced Emissions Solutions trades on a P/E ratio of 3.6, which is below the US market average of 14.4. The company does have a little debt, and EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer. What is very clear is that the market has become less pessimistic about Advanced Emissions Solutions over the last month, with the P/E ratio rising from 2.7 back then to 3.6 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you’re more sensitive to price, then you may feel the opportunity has 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Advanced Emissions Solutions. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.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.