The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how The Container Store Group, Inc.'s (NYSE:TCS) P/E ratio could help you assess the value on offer. Container Store Group has a price to earnings ratio of 14.08, based on the last twelve months. That corresponds to an earnings yield of approximately 7.1%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Container Store Group:
P/E of 14.08 = $6.34 ÷ $0.45 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Container Store Group Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Container Store Group has a P/E ratio that is roughly in line with the specialty retail industry average (14.3).
Its P/E ratio suggests that Container Store Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Container Store Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
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.
Container Store Group increased earnings per share by an impressive 11% over the last twelve months. And it has improved its earnings per share by 72% per year over the last three years. So one might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Container Store Group's Debt Impact Its P/E Ratio?
Container Store Group has net debt worth 83% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Container Store Group's P/E Ratio
Container Store Group's P/E is 14.1 which is below average (18) in the US market. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Container Store 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).
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