Yahoo Finance A Sliding Share Price Has Us Looking At Barnes Group Inc.'s (NYSE:B) P/E Ratio
To the annoyance of some shareholders, Barnes Group (NYSE:B) shares are down a considerable 31% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 30% drop over twelve months.
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). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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 Barnes Group
How Does Barnes Group's P/E Ratio Compare To Its Peers?
Barnes Group's P/E of 12.06 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (14.8) for companies in the machinery industry is higher than Barnes Group's P/E.
Barnes Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Barnes Group shrunk earnings per share by 2.7% last year. But over the longer term (5 years) earnings per share have increased by 7.0%.
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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 Barnes Group's Balance Sheet Tell Us?
Barnes Group has net debt equal to 39% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Barnes Group's P/E Ratio
Barnes Group trades on a P/E ratio of 12.1, which is fairly close to the US market average of 12.9. Given it has some debt, but didn't grow last year, the P/E indicates the market is expecting higher profits ahead for the business. Given Barnes Group's P/E ratio has declined from 17.5 to 12.1 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
But note: Barnes Group 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).
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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