Yahoo Finance Does The Michaels Companies, Inc. (NASDAQ:MIK) Have A Good P/E Ratio?
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 The Michaels Companies, Inc.'s (NASDAQ:MIK) P/E ratio to inform your assessment of the investment opportunity. Michaels Companies has a price to earnings ratio of 3.53, based on the last twelve months. That means that at current prices, buyers pay $3.53 for every $1 in trailing yearly profits.
See our latest analysis for Michaels Companies
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 Michaels Companies:
P/E of 3.53 = $7.23 ÷ $2.05 (Based on the trailing twelve months to August 2019.)
Is A High P/E 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. 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 Does Michaels Companies's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (16.3) for companies in the specialty retail industry is higher than Michaels Companies's P/E.
Its relatively low P/E ratio indicates that Michaels Companies shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Michaels Companies saw earnings per share improve by -9.7% last year. And its annual EPS growth rate over 5 years is 16%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Michaels Companies's Debt Impact Its P/E Ratio?
Net debt totals a substantial 229% of Michaels Companies's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Michaels Companies's P/E Ratio
Michaels Companies trades on a P/E ratio of 3.5, which is below the US market average of 18.2. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations.
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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
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. Thank you for reading.
