What Is Natural Grocers by Vitamin Cottage's (NYSE:NGVC) P/E Ratio After Its Share Price Rocketed?

The Natural Grocers by Vitamin Cottage (NYSE:NGVC) share price has done well in the last month, posting a gain of 76%. And the full year gain of 28% isn't too shabby, either!

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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Natural Grocers by Vitamin Cottage

How Does Natural Grocers by Vitamin Cottage's P/E Ratio Compare To Its Peers?

Natural Grocers by Vitamin Cottage's P/E is 23.31. The image below shows that Natural Grocers by Vitamin Cottage has a P/E ratio that is roughly in line with the consumer retailing industry average (22.2).

That indicates that the market expects Natural Grocers by Vitamin Cottage will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

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. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Natural Grocers by Vitamin Cottage increased earnings per share by a whopping 47% last year. And its annual EPS growth rate over 3 years is 18%. With that performance, I would expect it to have an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.

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).

So What Does Natural Grocers by Vitamin Cottage's Balance Sheet Tell Us?

Natural Grocers by Vitamin Cottage has net cash of US$29m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Natural Grocers by Vitamin Cottage's P/E Ratio

Natural Grocers by Vitamin Cottage has a P/E of 23.3. That's higher than the average in its market, which is 15.1. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What is very clear is that the market has become significantly more optimistic about Natural Grocers by Vitamin Cottage over the last month, with the P/E ratio rising from 13.2 back then to 23.3 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

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 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.