Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use Casey’s General Stores, Inc.’s (NASDAQ:CASY) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Casey’s General Stores has a P/E ratio of 24.43. That means that at current prices, buyers pay $24.43 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Casey’s General Stores:
P/E of 24.43 = $131.23 ÷ $5.37 (Based on the trailing twelve months to January 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. 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.
Casey’s General Stores’s earnings per share fell by 38% in the last twelve months. But EPS is up 11% over the last 5 years. And EPS is down 1.7% a year, over the last 3 years. This could justify a low P/E.
Does Casey’s General Stores Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (21.3) for companies in the consumer retailing industry is lower than Casey’s General Stores’s P/E.
Casey’s General Stores’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
Is Debt Impacting Casey’s General Stores’s P/E?
Casey’s General Stores has net debt equal to 27% of its market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Verdict On Casey’s General Stores’s P/E Ratio
Casey’s General Stores’s P/E is 24.4 which is above average (18.1) in the US market. 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.
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 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. Thank you for reading.