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Should You Be Tempted To Sell GDI Integrated Facility Services Inc (TSE:GDI) Because Of Its P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). 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 P/E ratio of 31.64, based on the last twelve months. That means that at current prices, buyers pay CA$31.64 for every CA$1 in trailing yearly profits.

Check out our latest analysis for GDI Integrated Facility Services

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 GDI Integrated Facility Services:

P/E of 31.64 = CA$17.86 ÷ CA$0.56 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

GDI Integrated Facility Services shrunk earnings per share by 25% over the last year. But it has grown its earnings per share by 72% per year over the last five years.

How Does GDI Integrated Facility Services’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, GDI Integrated Facility Services has a higher P/E than the average company (16.9) in the commercial services industry.

TSX:GDI PE PEG Gauge November 8th 18

GDI Integrated Facility Services’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

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).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

GDI Integrated Facility Services’s Balance Sheet

GDI Integrated Facility Services has net debt worth 34% 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 GDI Integrated Facility Services’s P/E Ratio

GDI Integrated Facility Services has a P/E of 31.6. That’s higher than the average in the CA market, which is 14.8. With some debt but no EPS growth last year, the market has high expectations of future profits.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than GDI Integrated Facility Services. 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.