Yahoo Finance What Is Aerojet Rocketdyne Holdings's (NYSE:AJRD) P/E Ratio After Its Share Price Tanked?
To the annoyance of some shareholders, Aerojet Rocketdyne Holdings (NYSE:AJRD) shares are down a considerable 31% in the last month. Looking back over the last year, the stock has been a solid performer, with a gain of 13%.
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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for Aerojet Rocketdyne Holdings
Does Aerojet Rocketdyne Holdings Have A Relatively High Or Low P/E For Its Industry?
Aerojet Rocketdyne Holdings's P/E of 21.26 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (14.5) for companies in the aerospace & defense industry is lower than Aerojet Rocketdyne Holdings's P/E.
Its relatively high P/E ratio indicates that Aerojet Rocketdyne Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Aerojet Rocketdyne Holdings maintained roughly steady earnings over the last twelve months. But EPS is up 88% over the last 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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).
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).
Aerojet Rocketdyne Holdings's Balance Sheet
Aerojet Rocketdyne Holdings has net cash of US$343m. This is fairly high at 12% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Aerojet Rocketdyne Holdings's P/E Ratio
Aerojet Rocketdyne Holdings trades on a P/E ratio of 21.3, which is above its market average of 13.3. The recent drop in earnings per share would make some investors cautious, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What can be absolutely certain is that the market has become significantly less optimistic about Aerojet Rocketdyne Holdings over the last month, with the P/E ratio falling from 30.6 back then to 21.3 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Aerojet Rocketdyne Holdings. 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 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.
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