Should We Worry About Texas Roadhouse, Inc.'s (NASDAQ:TXRH) P/E Ratio?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Texas Roadhouse, Inc.'s (NASDAQ:TXRH) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Texas Roadhouse has a P/E ratio of 28.91. That corresponds to an earnings yield of approximately 3.5%.
Check out our latest analysis for Texas Roadhouse
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Texas Roadhouse:
P/E of 28.91 = USD71.52 ÷ USD2.47 (Based on the year to December 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Texas Roadhouse'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 (24.2) for companies in the hospitality industry is lower than Texas Roadhouse's P/E.
Texas Roadhouse's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Texas Roadhouse increased earnings per share by an impressive 12% over the last twelve months. And earnings per share have improved by 15% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Texas Roadhouse's Balance Sheet Tell Us?
The extra options and safety that comes with Texas Roadhouse's US$125m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Texas Roadhouse's P/E Ratio
Texas Roadhouse's P/E is 28.9 which is above average (18.2) in its market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. Therefore it seems reasonable that the market would have relatively high expectations of the company
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Texas Roadhouse. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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. Thank you for reading.
