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 FedEx Corporation’s (NYSE:FDX) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, FedEx’s P/E ratio is 13.87. That is equivalent to an earnings yield of about 7.2%.
How Do You Calculate FedEx’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for FedEx:
P/E of 13.87 = $191.87 ÷ $13.83 (Based on the trailing twelve months to February 2019.)
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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
FedEx shrunk earnings per share by 17% over the last year. But it has grown its earnings per share by 21% per year over the last five years.
How Does FedEx’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (20.3) for companies in the logistics industry is higher than FedEx’s P/E.
Its relatively low P/E ratio indicates that FedEx shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with FedEx, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. 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).
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 FedEx’s Balance Sheet Tell Us?
Net debt is 31% of FedEx’s market cap. While it’s worth keeping this in mind, it isn’t a worry.
The Bottom Line On FedEx’s P/E Ratio
FedEx trades on a P/E ratio of 13.9, which is below the US market average of 18.1. With only modest debt, it’s likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.
Of course you might be able to find a better stock than FedEx. 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 firstname.lastname@example.org. 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.