Yahoo Finance What Does Five Below Inc’s (NASDAQ:FIVE) P/E Ratio Tell You?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Five Below Inc’s (NASDAQ:FIVE) P/E ratio to inform your assessment of the investment opportunity. Five Below has a price to earnings ratio of 41.63, based on the last twelve months. In other words, at today’s prices, investors are paying $41.63 for every $1 in prior year profit.
See our latest analysis for Five Below
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Five Below:
P/E of 41.63 = $95.58 ÷ $2.3 (Based on the year to November 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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.
It’s nice to see that Five Below grew EPS by a stonking 47% in the last year. And it has bolstered its earnings per share by 28% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Five Below’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (15.4) for companies in the specialty retail industry is lower than Five Below’s P/E.
That means that the market expects Five Below will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting Five Below’s P/E?
Since Five Below holds net cash of US$188m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Five Below’s P/E Ratio
Five Below’s P/E is 41.6 which is above average (17.3) in the US market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Five Below. 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).
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.
