What Is Hotel Chocolat Group's (LON:HOTC) P/E Ratio After Its Share Price Tanked?

Unfortunately for some shareholders, the Hotel Chocolat Group (LON:HOTC) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 22% in the last year.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Hotel Chocolat Group

Does Hotel Chocolat Group Have A Relatively High Or Low P/E For Its Industry?

Hotel Chocolat Group's P/E of 23.47 indicates some degree of optimism towards the stock. The image below shows that Hotel Chocolat Group has a higher P/E than the average (11.6) P/E for companies in the food industry.

That means that the market expects Hotel Chocolat Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's great to see that Hotel Chocolat Group grew EPS by 23% in the last year. And it has bolstered its earnings per share by 42% per year 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

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

So What Does Hotel Chocolat Group's Balance Sheet Tell Us?

Since Hotel Chocolat Group holds net cash of UK£24m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Hotel Chocolat Group's P/E Ratio

Hotel Chocolat Group trades on a P/E ratio of 23.5, which is above its market average of 12.6. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it does not seem strange that the P/E is above average. Given Hotel Chocolat Group's P/E ratio has declined from 34.0 to 23.5 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.

You might be able to find a better buy than Hotel Chocolat Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.