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Does Pizza Pizza Royalty Corp (TSE:PZA) Have A Good P/E Ratio?

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 Pizza Pizza Royalty Corp’s (TSE:PZA) P/E ratio to inform your assessment of the investment opportunity. Pizza Pizza Royalty has a price to earnings ratio of 9.94, based on the last twelve months. In other words, at today’s prices, investors are paying CA$9.94 for every CA$1 in prior year profit.

See our latest analysis for Pizza Pizza Royalty

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 Pizza Pizza Royalty:

P/E of 9.94 = CA$8.51 ÷ CA$0.86 (Based on the trailing twelve months to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. 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

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Pizza Pizza Royalty’s earnings per share fell by 1.6% in the last twelve months. But it has grown its earnings per share by 2.3% per year over the last three years. And it has shrunk its earnings per share by 1.3% per year over the last five years. So it would be surprising to see a high P/E.

How Does Pizza Pizza Royalty’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Pizza Pizza Royalty has a lower P/E than the average (17.8) P/E for companies in the hospitality industry.

TSX:PZA PE PEG Gauge November 6th 18
TSX:PZA PE PEG Gauge November 6th 18

Pizza Pizza Royalty’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. 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.

How Does Pizza Pizza Royalty’s Debt Impact Its P/E Ratio?

Pizza Pizza Royalty has net debt worth 16% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Pizza Pizza Royalty’s P/E Ratio

Pizza Pizza Royalty’s P/E is 9.9 which is below average (14.5) in the CA market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Pizza Pizza Royalty. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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