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Here's What The Greenbrier Companies, Inc.'s (NYSE:GBX) P/E Ratio Is Telling Us

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how The Greenbrier Companies, Inc.'s (NYSE:GBX) P/E ratio could help you assess the value on offer. What is Greenbrier Companies's P/E ratio? Well, based on the last twelve months it is 13.94. That corresponds to an earnings yield of approximately 7.2%.

See our latest analysis for Greenbrier Companies

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Greenbrier Companies:

P/E of 13.94 = $36.29 ÷ $2.6 (Based on the trailing twelve months to February 2019.)

Is A High P/E 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Greenbrier Companies saw earnings per share decrease by 47% last year. And EPS is down 30% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

How Does Greenbrier Companies's P/E Ratio Compare To Its Peers?

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 (22.6) for companies in the machinery industry is higher than Greenbrier Companies's P/E.

NYSE:GBX Price Estimation Relative to Market, May 7th 2019

This suggests that market participants think Greenbrier Companies will underperform other companies in its industry. Since the market seems unimpressed with Greenbrier Companies, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does Greenbrier Companies's Balance Sheet Tell Us?

Greenbrier Companies has net debt worth 14% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On Greenbrier Companies's P/E Ratio

Greenbrier Companies trades on a P/E ratio of 13.9, which is below the US market average of 18.4. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

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

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.