Is Ennis Inc’s (NYSE:EBF) P/E Ratio Really That Good?
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 begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Ennis Inc (NYSE:EBF) trades with a trailing P/E of 14.1x, which is lower than the industry average of 19.2x. While EBF might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
Check out our latest analysis for Ennis
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 EBF
Price-Earnings Ratio = Price per share ÷ Earnings per share
EBF Price-Earnings Ratio = $19.54 ÷ $1.385 = 14.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to EBF, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since EBF’s P/E of 14.1 is lower than its industry peers (19.2), it means that investors are paying less for each dollar of EBF’s earnings. This multiple is a median of profitable companies of 24 Commercial Services companies in US including Pointer Telocation, McGrath RentCorp and NL Industries. You can think of it like this: the market is suggesting that EBF is a weaker business than the average comparable company.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to EBF. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with EBF, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing EBF to are fairly valued by the market. If this is violated, EBF’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on EBF, the undervaluation of the stock may mean it is a good time to top up on 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 EBF’s future growth? Take a look at our free research report of analyst consensus for EBF’s outlook.
Past Track Record: Has EBF 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 EBF’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.
