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Here's What Six Flags Entertainment Corporation's (NYSE:SIX) P/E Ratio Is Telling Us

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Six Flags Entertainment Corporation's (NYSE:SIX) P/E ratio and reflect on what it tells us about the company's share price. Six Flags Entertainment has a P/E ratio of 16.45, based on the last twelve months. That is equivalent to an earnings yield of about 6.1%.

View our latest analysis for Six Flags Entertainment

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 Six Flags Entertainment:

P/E of 16.45 = $52.7 ÷ $3.2 (Based on the year to March 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 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Six Flags Entertainment's earnings per share were pretty steady over the last year. But it has grown its earnings per share by 21% per year over the last five years.

How Does Six Flags Entertainment's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Six Flags Entertainment has a lower P/E than the average (23) P/E for companies in the hospitality industry.

NYSE:SIX Price Estimation Relative to Market, July 3rd 2019

Its relatively low P/E ratio indicates that Six Flags Entertainment shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Six Flags Entertainment's Balance Sheet

Net debt totals 50% of Six Flags Entertainment's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Six Flags Entertainment's P/E Ratio

Six Flags Entertainment has a P/E of 16.4. That's below the average in the US market, which is 18.2. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations.

Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Six Flags Entertainment. 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).

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.