内容摘要：Those holdingCredit Acceptance(NASDAQ:CACC) shares must be pleased that the share price has rebounde colmeans in r

Those holding

Credit Acceptance

(

NASDAQ:CACC

) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately,colmeans in r the stock is still down by 27% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 37% 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.

Check out our latest analysis for Credit Acceptance

Does Credit Acceptance Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 8.98 that there is some investor optimism about Credit Acceptance. As you can see below, Credit Acceptance has a higher P/E than the average company (5.7) in the consumer finance industry.

NasdaqGS:CACC Price Estimation Relative to Market May 1st 2020

That means that the market expects Credit Acceptance will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check

if company insiders have been buying or selling

.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's great to see that Credit Acceptance grew EPS by 18% in the last year. And earnings per share have improved by 24% annually, over the last five years. With that performance, you might expect an above average P/E ratio.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Story continues

Credit Acceptance's Balance Sheet

Credit Acceptance has net debt worth 76% of its market capitalization. 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 Bottom Line On Credit Acceptance's P/E Ratio

Credit Acceptance's P/E is 9.0 which is below average (14.9) in the US market. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What is very clear is that the market has become less pessimistic about Credit Acceptance over the last month, with the P/E ratio rising from 6.9 back then to 9.0 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this

free

report on the analyst consensus forecasts

could help you make a

master move

on this stock.

Of course

you might be able to find a better stock than Credit Acceptance

. 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

[email protected]

. 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.

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