# Despite Its High P/E Ratio, Is John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS) Still Undervalued?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how John B. Sanfilippo & Son, Inc.’s (NASDAQ:JBSS) P/E ratio could help you assess the value on offer. Based on the last twelve months, John B. Sanfilippo & Son’s P/E ratio is 23.56. That means that at current prices, buyers pay \$23.56 for every \$1 in trailing yearly profits.

### How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for John B. Sanfilippo & Son:

P/E of 23.56 = \$58.54 ÷ \$2.48 (Based on the trailing twelve months to September 2018.)

### Is A High P/E 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

If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

John B. Sanfilippo & Son shrunk earnings per share by 23% over the last year. But it has grown its earnings per share by 6.9% per year over the last five years. And EPS is down 1.2% a year, over the last 3 years. This could justify a low P/E.

### How Does John B. Sanfilippo & Son’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 John B. Sanfilippo & Son has a higher P/E than the average (17.2) P/E for companies in the food industry.

Its relatively high P/E ratio indicates that John B. Sanfilippo & Son shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

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

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

### How Does John B. Sanfilippo & Son’s Debt Impact Its P/E Ratio?

John B. Sanfilippo & Son has net debt worth 12% of its market capitalization. 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 Bottom Line On John B. Sanfilippo & Son’s P/E Ratio

John B. Sanfilippo & Son has a P/E of 23.6. That’s higher than the average in the US market, which is 16.2. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: John B. Sanfilippo & Son 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.