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Should You Be Tempted To Sell Fresh Del Monte Produce Inc. (NYSE:FDP) Because Of Its P/E Ratio?

Simply Wall St

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 Fresh Del Monte Produce Inc.'s (NYSE:FDP) P/E ratio to inform your assessment of the investment opportunity. What is Fresh Del Monte Produce's P/E ratio? Well, based on the last twelve months it is 66.46. That is equivalent to an earnings yield of about 1.5%.

See our latest analysis for Fresh Del Monte Produce

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Fresh Del Monte Produce:

P/E of 66.46 = $25.62 ÷ $0.39 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Fresh Del Monte Produce 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 Fresh Del Monte Produce has a higher P/E than the average (25.9) P/E for companies in the food industry.

NYSE:FDP Price Estimation Relative to Market, August 28th 2019
NYSE:FDP Price Estimation Relative to Market, August 28th 2019

Fresh Del Monte Produce's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Fresh Del Monte Produce shrunk earnings per share by 52% over the last year. And it has shrunk its earnings per share by 47% per year over the last three years. This might lead to low expectations.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Fresh Del Monte Produce's P/E?

Fresh Del Monte Produce has net debt worth 53% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On Fresh Del Monte Produce's P/E Ratio

With a P/E ratio of 66.5, Fresh Del Monte Produce is expected to grow earnings very strongly in the years to come. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.

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.

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.