Yahoo Finance Does Patterson Companies, Inc. (NASDAQ:PDCO) 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). To keep it practical, we'll show how Patterson Companies, Inc.'s (NASDAQ:PDCO) P/E ratio could help you assess the value on offer. What is Patterson Companies's P/E ratio? Well, based on the last twelve months it is 14.37. That is equivalent to an earnings yield of about 7.0%.
View our latest analysis for Patterson Companies
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Patterson Companies:
P/E of 14.37 = $18.24 ÷ $1.27 (Based on the year to July 2019.)
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.'
Does Patterson Companies Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Patterson Companies has a lower P/E than the average (20.2) P/E for companies in the healthcare industry.
Patterson Companies's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Patterson Companies, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Patterson Companies saw earnings per share decrease by 29% last year. And it has shrunk its earnings per share by 8.0% per year over the last five years. This growth rate might warrant a below average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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 Patterson Companies's Balance Sheet Tell Us?
Patterson Companies's net debt equates to 37% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Patterson Companies's P/E Ratio
Patterson Companies has a P/E of 14.4. That's below the average in the US market, which is 18.2. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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.
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.
