Despite Its High P/E Ratio, Is Floor & Decor Holdings, Inc. (NYSE:FND) Still Undervalued?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Floor & Decor Holdings, Inc.’s (NYSE:FND) P/E ratio and reflect on what it tells us about the company’s share price. Floor & Decor Holdings has a P/E ratio of 32.07, based on the last twelve months. In other words, at today’s prices, investors are paying $32.07 for every $1 in prior year profit.

See our latest analysis for Floor & Decor Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Floor & Decor Holdings:

P/E of 32.07 = $38.5 ÷ $1.2 (Based on the trailing twelve months to December 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Floor & Decor Holdings saw earnings per share improve by -6.6% last year. And its annual EPS growth rate over 5 years is 43%.

How Does Floor & Decor Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Floor & Decor Holdings has a higher P/E than the average company (15.2) in the specialty retail industry.

NYSE:FND Price Estimation Relative to Market, March 6th 2019
NYSE:FND Price Estimation Relative to Market, March 6th 2019

Its relatively high P/E ratio indicates that Floor & Decor Holdings 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 delve deeper. I like to check if company insiders have been buying or selling.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Floor & Decor Holdings’s Debt Impact Its P/E Ratio?

Net debt totals just 3.8% of Floor & Decor Holdings’s market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Floor & Decor Holdings’s P/E Ratio

Floor & Decor Holdings’s P/E is 32.1 which is above average (17.6) in the US market. With debt at prudent levels and improving earnings, it’s fair to say the market expects steady progress in the future.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Floor & Decor Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.