This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Bridgford Foods Corporation’s (NASDAQ:BRID) P/E ratio and reflect on what it tells us about the company’s share price. Bridgford Foods has a price to earnings ratio of 21.67, based on the last twelve months. That is equivalent to an earnings yield of about 4.6%.
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 Bridgford Foods:
P/E of 21.67 = $17.75 ÷ $0.82 (Based on the trailing twelve months to July 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Bridgford Foods saw earnings per share decrease by 12% last year. But it has grown its earnings per share by 28% per year over the last five years. And it has shrunk its earnings per share by 22% per year over the last three years. This growth rate might warrant a low P/E ratio. This growth rate might warrant a low P/E ratio.
How Does Bridgford Foods’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (17.6) for companies in the food industry is lower than Bridgford Foods’s P/E.
That means that the market expects Bridgford Foods will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Bridgford Foods’s P/E?
Since Bridgford Foods holds net cash of US$13m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Bridgford Foods’s P/E Ratio
Bridgford Foods trades on a P/E ratio of 21.7, which is above the US market average of 17.1. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: Bridgford Foods 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.