Do You Know What Grand Canyon Education Inc’s (NASDAQ:LOPE) P/E Ratio Means?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Grand Canyon Education Inc’s (NASDAQ:LOPE) P/E ratio and reflect on what it tells us about the company’s share price. Grand Canyon Education has a P/E ratio of 25.27, based on the last twelve months. That means that at current prices, buyers pay $25.27 for every $1 in trailing yearly profits.
View our latest analysis for Grand Canyon Education
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 Grand Canyon Education:
P/E of 25.27 = $121.07 ÷ $4.79 (Based on the year to June 2018.)
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.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Grand Canyon Education increased earnings per share by a whopping 29% last year. And its annual EPS growth rate over 5 years is 19%. With that performance, I would expect it to have an above average P/E ratio.
How Does Grand Canyon Education’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (25.6) for companies in the consumer services industry is roughly the same as Grand Canyon Education’s P/E.
Its P/E ratio suggests that Grand Canyon Education shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Grand Canyon Education actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. 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 taking on debt (or spending its remaining cash).
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.
How Does Grand Canyon Education’s Debt Impact Its P/E Ratio?
Since Grand Canyon Education holds net cash of US$235m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Grand Canyon Education’s P/E Ratio
Grand Canyon Education’s P/E is 25.3 which is above average (18.1) in the US market. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it does not seem strange that the P/E is above average.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course you might be able to find a better stock than Grand Canyon Education. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.