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What Does Red Robin Gourmet Burgers, Inc.’s (NASDAQ:RRGB) P/E Ratio Tell You?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Red Robin Gourmet Burgers, Inc.’s (NASDAQ:RRGB) P/E ratio and reflect on what it tells us about the company’s share price. Red Robin Gourmet Burgers has a price to earnings ratio of 27.03, based on the last twelve months. That is equivalent to an earnings yield of about 3.7%.

See our latest analysis for Red Robin Gourmet Burgers

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 Red Robin Gourmet Burgers:

P/E of 27.03 = $27.15 ÷ $1 (Based on the year to October 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Red Robin Gourmet Burgers shrunk earnings per share by 4.9% last year. And over the longer term (5 years) earnings per share have decreased 15% annually. So you wouldn’t expect a very high P/E.

How Does Red Robin Gourmet Burgers’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Red Robin Gourmet Burgers has a higher P/E than the average company (15.6) in the hospitality industry.

NasdaqGS:RRGB PE PEG Gauge December 24th 18
NasdaqGS:RRGB PE PEG Gauge December 24th 18

That means that the market expects Red Robin Gourmet Burgers will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting Red Robin Gourmet Burgers’s P/E?

Red Robin Gourmet Burgers has net debt worth 60% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Red Robin Gourmet Burgers’s P/E Ratio

Red Robin Gourmet Burgers has a P/E of 27. That’s higher than the average in the US market, which is 15.8. With relatively high debt, and no earnings per share growth over twelve months, it’s safe to say the market believes the company will improve its earnings growth in the future.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Red Robin Gourmet Burgers 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 editorial-team@simplywallst.com.

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