Do You Like Covenant Transportation Group, Inc. (NASDAQ:CVTI) At This P/E Ratio?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Covenant Transportation Group, Inc.’s (NASDAQ:CVTI) P/E ratio to inform your assessment of the investment opportunity. Covenant Transportation Group has a P/E ratio of 10.48, based on the last twelve months. In other words, at today’s prices, investors are paying $10.48 for every $1 in prior year profit.

See our latest analysis for Covenant Transportation Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Covenant Transportation Group:

P/E of 10.48 = $24.28 ÷ $2.32 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Covenant Transportation Group saw earnings per share decrease by 24% last year. But it has grown its earnings per share by 27% per year over the last five years.

How Does Covenant Transportation Group’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (17.5) for companies in the transportation industry is higher than Covenant Transportation Group’s P/E.

Its relatively low P/E ratio indicates that Covenant Transportation Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Covenant Transportation Group, 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.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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 Covenant Transportation Group’s P/E?

Covenant Transportation Group has net debt worth 48% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Covenant Transportation Group’s P/E Ratio

Covenant Transportation Group has a P/E of 10.5. That’s below the average in the US market, which is 17.2. Since it only carries a modest debt load, it’s likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.

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.

But note: Covenant Transportation 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).

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.

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. On rare occasion, data errors may occur. Thank you for reading.