Is AMCON Distributing Company’s (NYSEMKT:DIT) P/E Ratio Really That Good?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use AMCON Distributing Company’s (NYSEMKT:DIT) P/E ratio to inform your assessment of the investment opportunity. What is AMCON Distributing’s P/E ratio? Well, based on the last twelve months it is 12.78. That corresponds to an earnings yield of approximately 7.8%.

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See our latest analysis for AMCON Distributing

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 AMCON Distributing:

P/E of 12.78 = $93.49 ÷ $7.31 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

AMCON Distributing’s earnings made like a rocket, taking off 55% last year. Unfortunately, earnings per share are down 1.2% a year, over 5 years.

How Does AMCON Distributing’s P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (19.5) for companies in the retail distributors industry is higher than AMCON Distributing’s P/E.

AMEX:DIT Price Estimation Relative to Market, May 20th 2019
AMEX:DIT Price Estimation Relative to Market, May 20th 2019

AMCON Distributing’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You 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

The ‘Price’ in P/E reflects the market capitalization of the company. 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 investing in growth. That means taking on debt (or spending its cash).

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.

AMCON Distributing’s Balance Sheet

Net debt is 37% of AMCON Distributing’s market cap. While it’s worth keeping this in mind, it isn’t a worry.

The Verdict On AMCON Distributing’s P/E Ratio

AMCON Distributing’s P/E is 12.8 which is below average (17.7) in the US market. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than AMCON Distributing. 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.