Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Core-Mark Holding Company, Inc.'s (NASDAQ:CORE) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Core-Mark Holding Company has a P/E ratio of 23.07. In other words, at today's prices, investors are paying $23.07 for every $1 in prior year profit.
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 Core-Mark Holding Company:
P/E of 23.07 = $27.01 ÷ $1.17 (Based on the year to September 2019.)
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 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.
Does Core-Mark Holding Company Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Core-Mark Holding Company has a higher P/E than the average company (19.6) in the retail distributors industry.
Its relatively high P/E ratio indicates that Core-Mark Holding Company shareholders think it will perform better than other companies in its industry classification. 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.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Core-Mark Holding Company earnings growth of 22% in the last year. And earnings per share have improved by 4.6% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Core-Mark Holding Company's Balance Sheet Tell Us?
Core-Mark Holding Company has net debt equal to 41% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Core-Mark Holding Company's P/E Ratio
Core-Mark Holding Company's P/E is 23.1 which is above average (18.9) in its market. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. So on this analysis it seems reasonable that its P/E ratio is above average.
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You might be able to find a better buy than Core-Mark Holding Company. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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