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What Is Renewable Energy Group's (NASDAQ:REGI) P/E Ratio After Its Share Price Tanked?

To the annoyance of some shareholders, Renewable Energy Group (NASDAQ:REGI) shares are down a considerable 31% in the last month. Even longer term holders have taken a real hit with the stock declining 17% 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.

View our latest analysis for Renewable Energy Group

How Does Renewable Energy Group's P/E Ratio Compare To Its Peers?

Renewable Energy Group's P/E of 1.84 indicates relatively low sentiment towards the stock. The image below shows that Renewable Energy Group has a lower P/E than the average (6.7) P/E for companies in the oil and gas industry.

NasdaqGS:REGI Price Estimation Relative to Market March 30th 2020
NasdaqGS:REGI Price Estimation Relative to Market March 30th 2020

This suggests that market participants think Renewable Energy Group will underperform other companies in its 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, Renewable Energy Group grew EPS by a whopping 27% in the last year. And it has bolstered its earnings per share by 38% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

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. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Renewable Energy Group's P/E?

Renewable Energy Group has net debt worth 18% 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 Renewable Energy Group's P/E Ratio

Renewable Energy Group has a P/E of 1.8. That's below the average in the US market, which is 13.0. The EPS growth last year was strong, and debt levels are quite reasonable. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given Renewable Energy Group's P/E ratio has declined from 2.7 to 1.8 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Renewable Energy 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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