How Does Hilton Worldwide Holdings's (NYSE:HLT) P/E Compare To Its Industry, After Its Big Share Price Gain?

Those holding Hilton Worldwide Holdings (NYSE:HLT) shares must be pleased that the share price has rebounded 30% in the last thirty days. But unfortunately, the stock is still down by 34% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 13% in the last year.

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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Hilton Worldwide Holdings

Does Hilton Worldwide Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 24.63 that there is some investor optimism about Hilton Worldwide Holdings. As you can see below, Hilton Worldwide Holdings has a higher P/E than the average company (12.8) in the hospitality industry.

Its relatively high P/E ratio indicates that Hilton Worldwide Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. 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.

It's great to see that Hilton Worldwide Holdings grew EPS by 21% in the last year. And earnings per share have improved by 43% annually, over the last five years. So one might expect an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Hilton Worldwide Holdings's Debt Impact Its P/E Ratio?

Hilton Worldwide Holdings's net debt equates to 34% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Hilton Worldwide Holdings's P/E Ratio

Hilton Worldwide Holdings's P/E is 24.6 which is above average (13.6) in its market. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. So on this analysis it seems reasonable that its P/E ratio is above average. What is very clear is that the market has become significantly more optimistic about Hilton Worldwide Holdings over the last month, with the P/E ratio rising from 18.9 back then to 24.6 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.

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Hilton Worldwide Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.