- Oops!Something went wrong.Please try again later.
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Travelzoo's (NASDAQ:TZOO) P/E ratio to inform your assessment of the investment opportunity. Travelzoo has a price to earnings ratio of 19.49, based on the last twelve months. In other words, at today's prices, investors are paying $19.49 for every $1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Travelzoo:
P/E of 19.49 = $10.32 ÷ $0.53 (Based on the trailing twelve months 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Travelzoo 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. The image below shows that Travelzoo has a lower P/E than the average (24.6) P/E for companies in the interactive media and services industry.
Its relatively low P/E ratio indicates that Travelzoo shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Travelzoo, 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Travelzoo's earnings made like a rocket, taking off 74% last year. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 12%. Regrettably, the longer term performance is poor, with EPS down 14% per year over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
Travelzoo's Balance Sheet
The extra options and safety that comes with Travelzoo's US$12m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Travelzoo's P/E Ratio
Travelzoo's P/E is 19.5 which is about average (18.3) in the US market. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Travelzoo to have a higher P/E ratio.
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 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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. Thank you for reading.