How Does Ollie's Bargain Outlet Holdings's (NASDAQ:OLLI) P/E Compare To Its Industry, After Its Big Share Price Gain?

Ollie's Bargain Outlet Holdings (NASDAQ:OLLI) shares have had a really impressive month, gaining 39%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 42% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Ollie's Bargain Outlet Holdings

How Does Ollie's Bargain Outlet Holdings's P/E Ratio Compare To Its Peers?

Ollie's Bargain Outlet Holdings's P/E of 23.99 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (7.1) for companies in the multiline retail industry is a lot lower than Ollie's Bargain Outlet Holdings's P/E.

That means that the market expects Ollie's Bargain Outlet Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Ollie's Bargain Outlet Holdings's earnings per share grew by 3.3% in the last twelve months. And its annual EPS growth rate over 5 years is 32%.

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. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Ollie's Bargain Outlet Holdings's Debt Impact Its P/E Ratio?

Ollie's Bargain Outlet Holdings has net cash of US$90m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Ollie's Bargain Outlet Holdings's P/E Ratio

Ollie's Bargain Outlet Holdings's P/E is 24.0 which is above average (13.7) in its market. Recent earnings growth wasn't bad. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come. What we know for sure is that investors have become much more excited about Ollie's Bargain Outlet Holdings recently, since they have pushed its P/E ratio from 17.3 to 24.0 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. 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.

But note: Ollie's Bargain Outlet Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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.