Why Shaw Communications Inc.’s (TSE:SJR.B) 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 apply a basic P/E ratio analysis to Shaw Communications Inc.’s (TSE:SJR.B), to help you decide if the stock is worth further research. What is Shaw Communications’s P/E ratio? Well, based on the last twelve months it is 30.76. That corresponds to an earnings yield of approximately 3.3%.

See our latest analysis for Shaw Communications

How Do I Calculate Shaw Communications’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for Shaw Communications:

P/E of 30.76 = CA$27.1 ÷ CA$0.88 (Based on the year to February 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 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

When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

In the last year, Shaw Communications grew EPS like Taylor Swift grew her fan base back in 2010; the 70% gain was both fast and well deserved. Unfortunately, earnings per share are down 13% a year, over 5 years.

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

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Shaw Communications has a higher P/E than the average company (13.8) in the media industry.

TSX:SJR.B Price Estimation Relative to Market, April 11th 2019
TSX:SJR.B Price Estimation Relative to Market, April 11th 2019

That means that the market expects Shaw Communications will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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.

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 Shaw Communications’s Debt Impact Its P/E Ratio?

Shaw Communications’s net debt equates to 29% of its market capitalization. While that’s enough to warrant consideration, it doesn’t really concern us.

The Verdict On Shaw Communications’s P/E Ratio

Shaw Communications has a P/E of 30.8. That’s higher than the average in the CA market, which is 15.2. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.

Investors should be looking to buy stocks that the market is wrong about. 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 be able to find a better stock than Shaw Communications. 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.