HRI’s current PE is a low 8.34x based on past earnings, which is -168.32274500208698 lower than 14.12x average multiple of the Trade Distributors. But can investors make a closing judgement of the company’s value based on this low multiple? The answer is no, since important variables like the company’s potential to grow and debt levels are ignored in the PE’s calculation. Below, I will lay out some important considerations to help determine which multiple best suits HRI. Let’s take a look below.
How much does HRI earn?
The PE multiple is useful for when a company is profitable, which is the case with HRI. This is because using PE to value an unprofitable business is flawed since the company has negative earnings (this will create a negative ratio). In this case, investors can use other useful tools like price-to-sales or price-to-book where appropriate. Historically, HRI has not always been profitable, until 2017 saw a breakeven period with earnings of US$160.30m, followed by the most recent bottom-line of US$189.40m. With upcoming earnings expected to remain positive, PE can be a valid multiple to apply to the company, however, there may be a better option.
Is HRI in a lot of debt?
HRI has US$2.19b in debt funding to operate business. This represents more than double the amount of equity in the business! This is highly risky, given that in the case of bankruptcy, there’s less of a chance you’d get anything back. You may be wondering how debt impacts an equity valuation. Well, the company’s share price theoretically represents the value of its equity portion only. However, it’s crucial to account for debt as well, since using leverage alters the capital structure, and influences the risk and performance of the business. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple.
HRI’s EV/EBITDA = US$3.73b / US$0 = 19.77x
Does HRI have a fast-growing outlook?
According to industry analyst consensus of earnings estimates, the bottom line is expected to decline by -18.22% every year for the next 5 years. This gives HRI an adverse growth outlook, let alone a fast one. The issue with using current earnings in the denominator of a multiple is that it doesn’t reflect this expected decline in the future, which is a setback for trailing multiples. Since a stock’s value should be reflective of future earnings, not the past, it may be best to use upcoming earnings as the denominator. To account for this growth we can use the one-year analyst-consensus future EBITDA (this is a “forward” multiple).
HRI’s forward EV/EBITDA = US$3.73b /US$660.71m = 5.65x
Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
- Financial Health: Is ’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.