This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use MarineMax, Inc.’s (NYSE:HZO) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, MarineMax’s P/E ratio is 9.92. That is equivalent to an earnings yield of about 10%.
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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 MarineMax:
P/E of 9.92 = $17.66 ÷ $1.78 (Based on the year to December 2018.)
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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
MarineMax increased earnings per share by a whopping 66% last year. And earnings per share have improved by 15% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 6.9% a year, over 3 years.
How Does MarineMax’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 MarineMax has a lower P/E than the average (15.2) P/E for companies in the specialty retail industry.
This suggests that market participants think MarineMax will underperform other companies in its industry. Since the market seems unimpressed with MarineMax, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
MarineMax’s Balance Sheet
Net debt totals 58% of MarineMax’s market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On MarineMax’s P/E Ratio
MarineMax trades on a P/E ratio of 9.9, which is below the US market average of 16.7. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than MarineMax. 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 email@example.com.