Yahoo Finance Does Fuling Global Inc. (NASDAQ:FORK) Have A Good P/E Ratio?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Fuling Global Inc.'s (NASDAQ:FORK) P/E ratio and reflect on what it tells us about the company's share price. Fuling Global has a price to earnings ratio of 3.76, based on the last twelve months. That is equivalent to an earnings yield of about 27%.
Check out our latest analysis for Fuling Global
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 Fuling Global:
P/E of 3.76 = $2.37 ÷ $0.63 (Based on the year to December 2018.)
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. 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.
Does Fuling Global Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Fuling Global has a lower P/E than the average (12.3) P/E for companies in the consumer durables industry.
Its relatively low P/E ratio indicates that Fuling Global shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Fuling Global, 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.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
It's great to see that Fuling Global grew EPS by 20% in the last year. And its annual EPS growth rate over 5 years is 16%. This could arguably justify a relatively high P/E ratio. Unfortunately, earnings per share are down 1.1% a year, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
So What Does Fuling Global's Balance Sheet Tell Us?
Net debt totals 68% of Fuling Global's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Fuling Global's P/E Ratio
Fuling Global has a P/E of 3.8. That's below the average in the US market, which is 17.1. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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. Although we don't have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.
But note: Fuling Global 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).
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.
