How Does XPO Logistics's (NYSE:XPO) P/E Compare To Its Industry, After Its Big Share Price Gain?

Those holding XPO Logistics (NYSE:XPO) shares must be pleased that the share price has rebounded 45% in the last thirty days. But unfortunately, the stock is still down by 36% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 11% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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 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.

View our latest analysis for XPO Logistics

How Does XPO Logistics's P/E Ratio Compare To Its Peers?

XPO Logistics's P/E of 14.93 indicates relatively low sentiment towards the stock. If you look at the image below, you can see XPO Logistics has a lower P/E than the average (18.3) in the logistics industry classification.

This suggests that market participants think XPO Logistics will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

It's great to see that XPO Logistics grew EPS by 25% in the last year. And it has improved its earnings per share by 90% per year over the last three years. So one might expect 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

Is Debt Impacting XPO Logistics's P/E?

Net debt totals 84% of XPO Logistics's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On XPO Logistics's P/E Ratio

XPO Logistics has a P/E of 14.9. That's higher than the average in its market, which is 13.6. It's good to see the recent earnings growth, although we note the company uses debt already. The relatively high P/E ratio suggests shareholders think growth will continue. What is very clear is that the market has become more optimistic about XPO Logistics over the last month, with the P/E ratio rising from 10.3 back then to 14.9 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: XPO Logistics 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.

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.