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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 Natural Grocers by Vitamin Cottage, Inc.’s (NYSE:NGVC), to help you decide if the stock is worth further research. Based on the last twelve months, Natural Grocers by Vitamin Cottage’s P/E ratio is 22.2. That means that at current prices, buyers pay $22.2 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Natural Grocers by Vitamin Cottage:
P/E of 22.2 = $10.05 ÷ $0.45 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. 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.
Natural Grocers by Vitamin Cottage’s earnings per share fell by 2.7% in the last twelve months. And EPS is down 3.3% a year, over the last 5 years. So you wouldn’t expect a very high P/E.
Does Natural Grocers by Vitamin Cottage Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Natural Grocers by Vitamin Cottage has a higher P/E than the average company (20.5) in the consumer retailing industry.
That means that the market expects Natural Grocers by Vitamin Cottage will outperform other companies in its industry.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Natural Grocers by Vitamin Cottage’s Balance Sheet Tell Us?
Natural Grocers by Vitamin Cottage’s net debt is 20% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On Natural Grocers by Vitamin Cottage’s P/E Ratio
Natural Grocers by Vitamin Cottage has a P/E of 22.2. That’s higher than the average in the US market, which is 18.1. 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 have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Natural Grocers by Vitamin Cottage. 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 email@example.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.