Despite Its High P/E Ratio, Is New Look Vision Group Inc. (TSE:BCI) Still Undervalued?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to New Look Vision Group Inc.’s (TSE:BCI), to help you decide if the stock is worth further research. What is New Look Vision Group’s P/E ratio? Well, based on the last twelve months it is 30.34. That is equivalent to an earnings yield of about 3.3%.

View our latest analysis for New Look Vision Group

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for New Look Vision Group:

P/E of 30.34 = CA$32.83 ÷ CA$1.08 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each CA$1 the company has earned over the last year. 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 Does New Look Vision Group’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that New Look Vision Group has a higher P/E than the average (12.4) P/E for companies in the specialty retail industry.

TSX:BCI Price Estimation Relative to Market, August 21st 2019
TSX:BCI Price Estimation Relative to Market, August 21st 2019

That means that the market expects New Look Vision Group will outperform other companies in its industry.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Notably, New Look Vision Group grew EPS by a whopping 31% in the last year. And earnings per share have improved by 15% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting New Look Vision Group’s P/E?

New Look Vision Group has net debt equal to 30% of its market cap. While that’s enough to warrant consideration, it doesn’t really concern us.

The Verdict On New Look Vision Group’s P/E Ratio

New Look Vision Group trades on a P/E ratio of 30.3, which is above its market average of 14. While the company does use modest debt, its recent earnings growth is superb. So to be frank we are not surprised it has a high P/E ratio.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

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 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.