Yahoo Finance Don’t Sell Parkland Fuel Corporation (TSE:PKI) Before You Read This
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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 Parkland Fuel Corporation’s (TSE:PKI) P/E ratio to inform your assessment of the investment opportunity. Parkland Fuel has a P/E ratio of 27.89, based on the last twelve months. That corresponds to an earnings yield of approximately 3.6%.
Check out our latest analysis for Parkland Fuel
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 Parkland Fuel:
P/E of 27.89 = CA$37.71 ÷ CA$1.35 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that Parkland Fuel grew EPS by a stonking 308% in the last year. And earnings per share have improved by 31% annually, over the last three years. With that performance, I would expect it to have an above average P/E ratio. In contrast, EPS has decreased by 7.3%, annually, over 5 years.
How Does Parkland Fuel’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Parkland Fuel has a higher P/E than the average company (14.3) in the oil and gas industry.
Parkland Fuel’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting Parkland Fuel’s P/E?
Parkland Fuel has net debt worth 39% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Parkland Fuel’s P/E Ratio
Parkland Fuel has a P/E of 27.9. That’s higher than the average in the CA market, which is 14.4. While the company does use modest debt, its recent earnings growth is impressive. So it does not seem strange that the P/E is above average.
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.
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.
