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Here's What Primoris Services Corporation's (NASDAQ:PRIM) P/E Ratio Is Telling Us

Simply Wall St

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Primoris Services Corporation's (NASDAQ:PRIM), to help you decide if the stock is worth further research. Primoris Services has a price to earnings ratio of 11.61, based on the last twelve months. That is equivalent to an earnings yield of about 8.6%.

See our latest analysis for Primoris Services

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Primoris Services:

P/E of 11.61 = $19.30 $1.66 (Based on the year to June 2019.)

Is A High Price-to-Earnings 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 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 Does Primoris Services's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Primoris Services has a lower P/E than the average (15.8) in the construction industry classification.

NasdaqGS:PRIM Price Estimation Relative to Market, October 3rd 2019
NasdaqGS:PRIM Price Estimation Relative to Market, October 3rd 2019

Its relatively low P/E ratio indicates that Primoris Services shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Primoris Services, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

In the last year, Primoris Services grew EPS like Taylor Swift grew her fan base back in 2010; the 54% gain was both fast and well deserved. And earnings per share have improved by 30% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting Primoris Services's P/E?

Primoris Services has net debt equal to 37% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Primoris Services's P/E Ratio

Primoris Services has a P/E of 11.6. That's below the average in the US market, which is 17.4. The company hasn't stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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 Primoris Services. 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.