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How Does Enova International's (NYSE:ENVA) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Enova International (NYSE:ENVA) share price has dived 38% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 48% in that time.

All else being equal, a share price drop should make a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

Check out our latest analysis for Enova International

Does Enova International Have A Relatively High Or Low P/E For Its Industry?

Enova International's P/E of 3.18 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (4.3) for companies in the consumer finance industry is higher than Enova International's P/E.

NYSE:ENVA Price Estimation Relative to Market April 3rd 2020
NYSE:ENVA Price Estimation Relative to Market April 3rd 2020

This suggests that market participants think Enova International will underperform other companies in its industry. Since the market seems unimpressed with Enova International, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Enova International's earnings made like a rocket, taking off 103% last year. And earnings per share have improved by 54% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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).

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).

Is Debt Impacting Enova International's P/E?

Enova International has net debt worth a very significant 241% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On Enova International's P/E Ratio

Enova International trades on a P/E ratio of 3.2, which is below the US market average of 12.5. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What can be absolutely certain is that the market has become more pessimistic about Enova International over the last month, with the P/E ratio falling from 5.2 back then to 3.2 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Enova International 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.