Here's What Premier Investments Limited's (ASX:PMV) P/E Is Telling Us
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Premier Investments Limited's (ASX:PMV) P/E ratio to inform your assessment of the investment opportunity. Premier Investments has a price to earnings ratio of 26.88, based on the last twelve months. That is equivalent to an earnings yield of about 3.7%.
Check out our latest analysis for Premier Investments
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 Premier Investments:
P/E of 26.88 = A$15.96 ÷ A$0.59 (Based on the trailing twelve months to January 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each A$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
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Premier Investments saw earnings per share decrease by 16% last year. And EPS is down 3.1% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
How Does Premier Investments's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (12.6) for companies in the specialty retail industry is lower than Premier Investments's P/E.
That means that the market expects Premier Investments will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. 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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
Premier Investments's Balance Sheet
Since Premier Investments holds net cash of AU$59m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Premier Investments's P/E Ratio
Premier Investments has a P/E of 26.9. That's higher than the average in the AU market, which is 16. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
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.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.
