The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Core-Mark Holding Company, Inc.'s (NASDAQ:CORE) P/E ratio to inform your assessment of the investment opportunity. What is Core-Mark Holding Company's P/E ratio? Well, based on the last twelve months it is 21.21. That is equivalent to an earnings yield of about 4.7%.
View our latest analysis for Core-Mark Holding Company
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Core-Mark Holding Company:
P/E of 21.21 = USD24.84 ÷ USD1.17 (Based on the trailing twelve months to September 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 Does Core-Mark Holding Company's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Core-Mark Holding Company has a higher P/E than the average company (19.1) in the retail distributors industry.
Its relatively high P/E ratio indicates that Core-Mark Holding Company shareholders think it will perform better than other companies in its industry classification. 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.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It's great to see that Core-Mark Holding Company grew EPS by 22% in the last year. And its annual EPS growth rate over 5 years is 4.6%. With that performance, you might expect an above average P/E ratio.
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. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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).
Core-Mark Holding Company's Balance Sheet
Net debt is 45% of Core-Mark Holding Company's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Core-Mark Holding Company's P/E Ratio
Core-Mark Holding Company has a P/E of 21.2. That's higher than the average in its market, which is 18.6. Its debt levels do not imperil its balance sheet and it is growing EPS strongly. Therefore, it's not particularly surprising that it has a above average P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Core-Mark Holding Company 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).
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.
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. Thank you for reading.