What Does GMS Inc’s (NYSE:GMS) PE Ratio Tell You?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
GMS Inc (NYSE:GMS) trades on a trailing P/E of 15.6. This isn’t too far from the industry average (which is 15.6). Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for GMS
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for GMS
Price-Earnings Ratio = Price per share ÷ Earnings per share
GMS Price-Earnings Ratio = $21.36 ÷ $1.367 = 15.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GMS, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. GMS Inc (NYSE:GMS) is trading with a trailing P/E of 15.6, which is close to the industry average of 15.6. This multiple is a median of profitable companies of 24 Trade Distributors companies in US including Star Struck, AeroCentury and Willis Lease Finance. One could put it like this: the market is pricing GMS as if it is roughly average for its industry.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to GMS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if GMS Inc is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to GMS may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.
What this means for you:
Since you may have already conducted your due diligence on GMS, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for GMS’s future growth? Take a look at our free research report of analyst consensus for GMS’s outlook.
Past Track Record: Has GMS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GMS’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 editorial-team@simplywallst.com.
