Despite Its High P/E Ratio, Is GP Strategies Corporation (NYSE:GPX) Still Undervalued?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use GP Strategies Corporation’s (NYSE:GPX) P/E ratio to inform your assessment of the investment opportunity. GP Strategies has a P/E ratio of 26.13, based on the last twelve months. In other words, at today’s prices, investors are paying $26.13 for every $1 in prior year profit.

View our latest analysis for GP Strategies

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for GP Strategies:

P/E of 26.13 = $14.33 ÷ $0.55 (Based on the trailing twelve months to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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 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. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

GP Strategies’s earnings per share fell by 54% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 11% annually. This growth rate might warrant a below average P/E ratio.

How Does GP Strategies’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that GP Strategies has a higher P/E than the average (23.3) P/E for companies in the professional services industry.

NYSE:GPX Price Estimation Relative to Market, March 18th 2019
NYSE:GPX Price Estimation Relative to Market, March 18th 2019

That means that the market expects GP Strategies will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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).

Is Debt Impacting GP Strategies’s P/E?

GP Strategies’s net debt is 40% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On GP Strategies’s P/E Ratio

GP Strategies has a P/E of 26.1. That’s higher than the average in the US market, which is 17.6. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: GP Strategies may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.