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Why Wingstop Inc’s (NASDAQ:WING) High P/E Ratio Isn’t Necessarily A Bad Thing

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Wingstop Inc’s (NASDAQ:WING) P/E ratio and reflect on what it tells us about the company’s share price. Wingstop has a P/E ratio of 59.72, based on the last twelve months. That means that at current prices, buyers pay $59.72 for every $1 in trailing yearly profits.

Check out our latest analysis for Wingstop

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 Wingstop:

P/E of 59.72 = $62.9 ÷ $1.05 (Based on the trailing twelve months to September 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

Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Notably, Wingstop grew EPS by a whopping 51% in the last year. And it has bolstered its earnings per share by 32% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

How Does Wingstop’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16.8) for companies in the hospitality industry is a lot lower than Wingstop’s P/E.

NasdaqGS:WING PE PEG Gauge November 26th 18
NasdaqGS:WING PE PEG Gauge November 26th 18

That means that the market expects Wingstop will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

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.

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 Wingstop’s Debt Impact Its P/E Ratio?

Net debt totals 11% of Wingstop’s market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Bottom Line On Wingstop’s P/E Ratio

Wingstop has a P/E of 59.7. That’s significantly higher than the average in the US market, which is 17.9. While the company does use modest debt, its recent earnings growth is impressive. Therefore it seems reasonable that the market would have relatively high expectations of the company

Investors have an opportunity when market expectations about a stock are wrong. 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 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.

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.

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