Yahoo Finance What Is Black Hills's (NYSE:BKH) P/E Ratio After Its Share Price Rocketed?
Those holding Black Hills (NYSE:BKH) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 17% over a quarter. The bad news is that even after that recovery shareholders are still underwater by about 5.2% for the full year.
All else being equal, a sharp share price increase should make a stock less 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 deep value investors might steer clear when expectations of a company are too high. 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 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.
See our latest analysis for Black Hills
Does Black Hills Have A Relatively High Or Low P/E For Its Industry?
Black Hills has a P/E ratio of 20.58. You can see in the image below that the average P/E (20.4) for companies in the integrated utilities industry is roughly the same as Black Hills's P/E.
Its P/E ratio suggests that Black Hills shareholders think that in the future it will perform about the same as other companies in its industry classification. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Black Hills shrunk earnings per share by 33% over the last year. But EPS is up 2.2% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
How Does Black Hills's Debt Impact Its P/E Ratio?
Black Hills's net debt is 82% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Black Hills's P/E Ratio
Black Hills's P/E is 20.6 which is above average (13.6) in its market. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What we know for sure is that investors have become more excited about Black Hills recently, since they have pushed its P/E ratio from 15.6 to 20.6 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 better than it expects, you can make money by buying and holding for the long term. 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.
You might be able to find a better buy than Black Hills. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
