Here’s How P/E Ratios Can Help Us Understand UniFirst Corporation (NYSE:UNF)
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at UniFirst Corporation’s (NYSE:UNF) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, UniFirst’s P/E ratio is 15.92. That means that at current prices, buyers pay $15.92 for every $1 in trailing yearly profits.
See our latest analysis for UniFirst
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 UniFirst:
P/E of 15.92 = $136.99 ÷ $8.6 (Based on the year to November 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that UniFirst grew EPS by a stonking 129% in the last year. And it has bolstered its earnings per share by 1.0% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does UniFirst’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see UniFirst has a lower P/E than the average (18.5) in the commercial services industry classification.
This suggests that market participants think UniFirst will underperform other companies in its industry. Since the market seems unimpressed with UniFirst, 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.
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. 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 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.
How Does UniFirst’s Debt Impact Its P/E Ratio?
Since UniFirst holds net cash of US$277m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On UniFirst’s P/E Ratio
UniFirst’s P/E is 15.9 which is about average (16.8) in the US market. Considering its recent growth, alongside its lack of debt, it would appear that the market isn’t very excited about the future.
Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than UniFirst. 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).
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.