U.S. Markets open in 3 hrs 6 mins

Why MTY Food Group Inc.'s (TSE:MTY) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to MTY Food Group Inc.'s (TSE:MTY), to help you decide if the stock is worth further research. What is MTY Food Group's P/E ratio? Well, based on the last twelve months it is 19.01. That corresponds to an earnings yield of approximately 5.3%.

Check out our latest analysis for MTY Food Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for MTY Food Group:

P/E of 19.01 = CA$55.17 ÷ CA$2.90 (Based on the year to August 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each CA$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does MTY Food Group Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below MTY Food Group has a P/E ratio that is fairly close for the average for the hospitality industry, which is 17.8.

TSX:MTY Price Estimation Relative to Market, November 19th 2019

That indicates that the market expects MTY Food Group will perform roughly in line with other companies in its industry. So if MTY Food Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

MTY Food Group saw earnings per share decrease by 34% last year. But EPS is up 15% over the last 5 years.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

How Does MTY Food Group's Debt Impact Its P/E Ratio?

MTY Food Group has net debt equal to 38% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On MTY Food Group's P/E Ratio

MTY Food Group has a P/E of 19.0. That's higher than the average in its market, which is 14.5. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 be able to find a better stock than MTY Food Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.