Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how GDI Integrated Facility Services Inc.'s (TSE:GDI) P/E ratio could help you assess the value on offer. GDI Integrated Facility Services has a price to earnings ratio of 40.75, based on the last twelve months. That is equivalent to an earnings yield of about 2.5%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for GDI Integrated Facility Services:
P/E of 40.75 = CA$24.45 ÷ CA$0.60 (Based on the trailing twelve months 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. 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by GDI Integrated Facility Services earnings growth of 18% in the last year. And earnings per share have improved by 71% annually, over the last three years. So one might expect an above average P/E ratio. But earnings per share are down 22% per year over the last five years.
Does GDI Integrated Facility Services 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. As you can see below, GDI Integrated Facility Services has a higher P/E than the average company (15.9) in the commercial services industry.
Its relatively high P/E ratio indicates that GDI Integrated Facility Services shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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 GDI Integrated Facility Services's Balance Sheet Tell Us?
Net debt is 31% of GDI Integrated Facility Services's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On GDI Integrated Facility Services's P/E Ratio
GDI Integrated Facility Services trades on a P/E ratio of 40.8, which is above the CA market average of 15.2. While the company does use modest debt, its recent earnings growth is very good. Therefore, it's not particularly surprising that it has a above average P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 be able to find a better stock than GDI Integrated Facility Services. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 email@example.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.