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How Does Chart Industries's (NASDAQ:GTLS) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Chart Industries (NASDAQ:GTLS) shareholders are no doubt pleased to see that the share price has bounced 90% in the last month alone, although it is still down 55% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 64% share price decline throughout the 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Chart Industries

Does Chart Industries Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 23.09 that there is some investor optimism about Chart Industries. You can see in the image below that the average P/E (16.0) for companies in the machinery industry is lower than Chart Industries's P/E.

NasdaqGS:GTLS Price Estimation Relative to Market April 19th 2020

Its relatively high P/E ratio indicates that Chart Industries 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.

Chart Industries saw earnings per share decrease by 21% last year. But it has grown its earnings per share by 35% per year over the last three years. And EPS is down 13% a year, over the last 5 years. This might lead to muted expectations.

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Chart Industries's Debt Impact Its P/E Ratio?

Net debt totals 58% of Chart Industries's 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 Chart Industries's P/E Ratio

Chart Industries has a P/E of 23.1. That's higher than the average in its market, which is 13.6. 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 much more excited about Chart Industries recently, since they have pushed its P/E ratio from 12.2 to 23.1 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.

Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Chart Industries. 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.