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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at 1-800-FLOWERS.COM, Inc.'s (NASDAQ:FLWS) P/E ratio and reflect on what it tells us about the company's share price. 1-800-FLOWERS.COM has a P/E ratio of 35.46, based on the last twelve months. In other words, at today's prices, investors are paying $35.46 for every $1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for 1-800-FLOWERS.COM:
P/E of 35.46 = $19.18 ÷ $0.54 (Based on the year to March 2019.)
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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Does 1-800-FLOWERS.COM's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that 1-800-FLOWERS.COM has a P/E ratio that is roughly in line with the online retail industry average (34.3).
That indicates that the market expects 1-800-FLOWERS.COM will perform roughly in line with other companies in its industry. So if 1-800-FLOWERS.COM actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
1-800-FLOWERS.COM saw earnings per share decrease by 38% last year. But over the longer term (5 years) earnings per share have increased by 23%. And over the longer term (3 years) earnings per share have decreased 1.8% annually. This growth rate might warrant a low P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
How Does 1-800-FLOWERS.COM's Debt Impact Its P/E Ratio?
1-800-FLOWERS.COM has net cash of US$111m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On 1-800-FLOWERS.COM's P/E Ratio
1-800-FLOWERS.COM has a P/E of 35.5. That's higher than the average in its market, which is 18. The recent drop in earnings per share might keep 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. 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 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 email@example.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.