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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 Shoe Carnival, Inc.’s (NASDAQ:SCVL) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Shoe Carnival’s P/E ratio is 16.67. That is equivalent to an earnings yield of about 6.0%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Shoe Carnival:
P/E of 16.67 = $35.37 ÷ $2.12 (Based on the year to November 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that Shoe Carnival grew EPS by a stonking 64% in the last year. And earnings per share have improved by 5.2% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Shoe Carnival’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Shoe Carnival has a P/E ratio that is roughly in line with the specialty retail industry average (16.1).
Its P/E ratio suggests that Shoe Carnival shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. 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 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 Shoe Carnival’s Debt Impact Its P/E Ratio?
Since Shoe Carnival holds net cash of US$40m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Shoe Carnival’s P/E Ratio
Shoe Carnival’s P/E is 16.7 which is about average (16.8) in the US market. With a strong balance sheet combined with recent growth, the P/E implies the market is quite pessimistic. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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 Shoe Carnival. 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.