Yahoo Finance A Sliding Share Price Has Us Looking At Black Hills Corporation's (NYSE:BKH) P/E Ratio
Unfortunately for some shareholders, the Black Hills (NYSE:BKH) share price has dived 37% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 25% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 Black Hills
Does Black Hills Have A Relatively High Or Low P/E For Its Industry?
Black Hills's P/E is 16.46. As you can see below Black Hills has a P/E ratio that is fairly close for the average for the integrated utilities industry, which is 15.9.
That indicates that the market expects Black Hills will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Black Hills shrunk earnings per share by 33% over the last year. But over the longer term (5 years) earnings per share have increased by 2.2%.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Black Hills's Balance Sheet Tell Us?
Net debt totals a substantial 103% of Black Hills's market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Verdict On Black Hills's P/E Ratio
Black Hills trades on a P/E ratio of 16.5, which is above its market average of 12.7. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. Given Black Hills's P/E ratio has declined from 26.0 to 16.5 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 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.
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