To the annoyance of some shareholders, Cracker Barrel Old Country Store (NASDAQ:CBRL) shares are down a considerable 32% in the last month. That drop has capped off a tough year for shareholders, with the share price down 30% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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.
How Does Cracker Barrel Old Country Store's P/E Ratio Compare To Its Peers?
Cracker Barrel Old Country Store's P/E of 11.92 indicates relatively low sentiment towards the stock. The image below shows that Cracker Barrel Old Country Store has a lower P/E than the average (15.6) P/E for companies in the hospitality industry.
This suggests that market participants think Cracker Barrel Old Country Store will underperform other companies in its industry. Since the market seems unimpressed with Cracker Barrel Old Country Store, it's quite possible it could surprise on the upside. 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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Cracker Barrel Old Country Store had pretty flat EPS growth in the last year. But it has grown its earnings per share by 7.9% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Cracker Barrel Old Country Store's Balance Sheet
Cracker Barrel Old Country Store has net debt worth 15% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Bottom Line On Cracker Barrel Old Country Store's P/E Ratio
Cracker Barrel Old Country Store trades on a P/E ratio of 11.9, which is below the US market average of 14.7. EPS grew over the last twelve months, and debt levels are quite reasonable. The P/E ratio implies the market is cautious about longer term prospects. What can be absolutely certain is that the market has become significantly less optimistic about Cracker Barrel Old Country Store over the last month, with the P/E ratio falling from 17.5 back then to 11.9 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.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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