Those holding IES Holdings (NASDAQ:IESC) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 9.0% over a quarter. The full year gain of 22% is pretty reasonable, too.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. Perhaps the simplest way to get a read on investors' expectations of a business 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.
Does IES Holdings Have A Relatively High Or Low P/E For Its Industry?
IES Holdings has a P/E ratio of 13.75. You can see in the image below that the average P/E (13.5) for companies in the construction industry is roughly the same as IES Holdings's P/E.
IES Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Notably, IES Holdings grew EPS by a whopping 39% in the last year. And its annual EPS growth rate over 5 years is 27%. I'd therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 32%, annually, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.
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.
IES Holdings's Balance Sheet
IES Holdings has net cash of US$15m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On IES Holdings's P/E Ratio
IES Holdings's P/E is 13.7 which is about average (14.7) in the US market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect IES Holdings to have a higher P/E ratio. What we know for sure is that investors have become more excited about IES Holdings recently, since they have pushed its P/E ratio from 10.5 to 13.7 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: IES 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).
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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. 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. Thank you for reading.