Advanced Drainage Systems (WMS) stunned Wall Street today, surging 12.6% during regular trading hours and ending the day at $135.62. WMS shares are up 4.4% over the last 12 months, and are now closing in on their 52 week high of $138.02. The industrial company is currently 10.1% above its average target price of $123.2 and has an average analyst rating of buy.
Advanced Drainage Systems's trailing 12 month price to earnings (P/E) ratio is 43.1, which corresponds to is its share price divided by its trailing earnings per share (Eps) of $3.15. The company has a forward P/E ratio of 23.1 based on its forward Eps of $5.86 -- which is an estimate of future earnings provided by management. Should these estimates be accurate, the company's future value shows potential.
The P/E ratio tells us how much investors are willing to pay for each dollar of the company's net earnings from its sales operations. By way of comparison, the S&P 500 has historically had an average P/E ratio around 20, but a company's price can remain stable for a long time even if it is over or under valued.
Advanced drainage systems, inc.'s year on year (YOY) quarterly earnings are growing at a rate of 135.2% and its YOY quarterly revenues are increasing at a rate of 52.8%, which shows that the company's profit margins are widening as its revenues from sales are increasing at a faster rate than its costs of goods sold.
The company's gross profit margins are 29.6%, which allows us to infer that its competitive advantage is not absolute. Profit margins below 40% indicate that the company does not have total freedom in setting its prices, and faces at least some pricing pressure from its competitors.
Company accountants calculate earnings by subtracting the costs of sales from its revenues. These metrics focus on the sales side of the company only -- it's important to remember that companies can have many other costs and sources of income that are independent from its core business. For example, a company may have extensive expenses such as rent and depreciation, and on the other hand it may receive additional income from its investments.
WMS's levered free cashflow, which represents the sum of inflows and outflows of cash from all sources, including capital expenses and overhead, is is $126,151,128. This is the pool of liquidity that the company can use to reinvest in its business or pay out to its equity investors in the form of a dividend. over the last twelve months investors in Advanced drainage systems, inc. have enjoyed a dividend yield of 0.4%.
The last valuation metric we will look at for this stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present value of the company if it were liquidated today (i.e. selling all assets and paying off all debts). Advanced drainage systems, inc.'s P/B ratio tells us that the market value of the company exceeds its book value by a factor of 11.0, so the company's assets may be overvalued compared to the average P/B ratio of the S&P 500, which stands at 4.5.
All in all, Advanced Drainage systems appears to be a fairly valued stock. While its P/E and P/B ratios indicate a potentially inflated valuation, its strong revenue growth, solid profit margins, and positive cashflows show that the company is on the right track. Don't forget to subscribe to our free newsletter for more analysis of each day's big movers!
