Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Soars 28% But It's A Story Of Risk Vs Reward

Academy Sports and Outdoors, Inc. (NASDAQ:ASO) shares have continued their recent momentum with a 28% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, Academy Sports and Outdoors' price-to-earnings (or "P/E") ratio of 9.6x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 34x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Academy Sports and Outdoors hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Academy Sports and Outdoors

Want the full picture on analyst estimates for the company? Then our free report on Academy Sports and Outdoors will help you uncover what's on the horizon.

How Is Academy Sports and Outdoors' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Academy Sports and Outdoors' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 19% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10% each year over the next three years. With the market predicted to deliver 11% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it odd that Academy Sports and Outdoors is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift Academy Sports and Outdoors' P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Academy Sports and Outdoors currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Academy Sports and Outdoors with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.