Does MasterCraft Boat Holdings, Inc.'s (NASDAQ:MCFT) P/E Ratio Signal A Buying Opportunity?
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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use MasterCraft Boat Holdings, Inc.'s (NASDAQ:MCFT) P/E ratio to inform your assessment of the investment opportunity. MasterCraft Boat Holdings has a price to earnings ratio of 8.37, based on the last twelve months. That means that at current prices, buyers pay $8.37 for every $1 in trailing yearly profits.
View our latest analysis for MasterCraft Boat Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for MasterCraft Boat Holdings:
P/E of 8.37 = $20.01 ÷ $2.39 (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.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Notably, MasterCraft Boat Holdings grew EPS by a whopping 36% in the last year. And earnings per share have improved by 6.0% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Does MasterCraft Boat Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (18.7) for companies in the leisure industry is higher than MasterCraft Boat Holdings's P/E.
Its relatively low P/E ratio indicates that MasterCraft Boat Holdings shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
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.
MasterCraft Boat Holdings's Balance Sheet
Net debt is 32% of MasterCraft Boat Holdings's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On MasterCraft Boat Holdings's P/E Ratio
MasterCraft Boat Holdings's P/E is 8.4 which is below average (18.2) in the US market. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
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. Thank you for reading.
