This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at DXP Enterprises, Inc.'s (NASDAQ:DXPE) P/E ratio and reflect on what it tells us about the company's share price. What is DXP Enterprises's P/E ratio? Well, based on the last twelve months it is 14.68. That corresponds to an earnings yield of approximately 6.8%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for DXP Enterprises:
P/E of 14.68 = $37.49 ÷ $2.55 (Based on the year to September 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does DXP Enterprises Have A Relatively High Or Low P/E For Its Industry?
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 DXP Enterprises has a lower P/E than the average (17.0) in the trade distributors industry classification.
This suggests that market participants think DXP Enterprises will underperform other companies in its industry. Since the market seems unimpressed with DXP Enterprises, 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
DXP Enterprises increased earnings per share by a whopping 44% last year. In contrast, EPS has decreased by 8.9%, annually, over 5 years.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
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).
DXP Enterprises's Balance Sheet
DXP Enterprises's net debt equates to 32% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On DXP Enterprises's P/E Ratio
DXP Enterprises's P/E is 14.7 which is below average (18.1) in the US market. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than DXP Enterprises. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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