This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Republic Services, Inc.’s (NYSE:RSG) P/E ratio could help you assess the value on offer. Republic Services has a price to earnings ratio of 27.75, based on the last twelve months. In other words, at today’s prices, investors are paying $27.75 for every $1 in prior year profit.
How Do You Calculate Republic Services’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Republic Services:
P/E of 27.75 = USD93.46 ÷ USD3.37 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Republic Services Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Republic Services has a P/E ratio that is fairly close for the average for the commercial services industry, which is 26.4.
Its P/E ratio suggests that Republic Services shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Republic Services shrunk earnings per share by 21% over the last year. But it has grown its earnings per share by 10% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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).
How Does Republic Services’s Debt Impact Its P/E Ratio?
Republic Services’s net debt equates to 29% of its market capitalization. While that’s enough to warrant consideration, it doesn’t really concern us.
The Bottom Line On Republic Services’s P/E Ratio
Republic Services has a P/E of 27.8. That’s higher than the average in its market, which is 19.0. With some debt but no EPS growth last year, the market has high expectations of future profits.
Investors have an opportunity when market expectations about a stock are wrong. 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 Republic Services. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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