Yahoo Finance Here’s What Enerflex Ltd.’s (TSE:EFX) P/E Ratio Is Telling Us
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Enerflex Ltd.’s (TSE:EFX) P/E ratio and reflect on what it tells us about the company’s share price. Enerflex has a P/E ratio of 14.31, based on the last twelve months. In other words, at today’s prices, investors are paying CA$14.31 for every CA$1 in prior year profit.
Check out our latest analysis for Enerflex
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Enerflex:
P/E of 14.31 = CA$15.45 ÷ CA$1.08 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.
It’s nice to see that Enerflex grew EPS by a stonking 280% in the last year. And it has improved its earnings per share by 46% per year over the last three years. So we’d generally expect it to have a relatively high P/E ratio. In contrast, EPS has decreased by 9.8%, annually, over 5 years.
How Does Enerflex’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 (14.7) for companies in the energy services industry is roughly the same as Enerflex’s P/E.
Its P/E ratio suggests that Enerflex shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Enerflex’s Debt Impact Its P/E Ratio?
Net debt totals 12% of Enerflex’s market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Verdict On Enerflex’s P/E Ratio
Enerflex trades on a P/E ratio of 14.3, which is above the CA market average of 13.2. Its debt levels do not imperil its balance sheet and it has already proven it can grow. 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. 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.
You might be able to find a better buy than Enerflex. 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.
