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Do You Like DICK'S Sporting Goods, Inc. (NYSE:DKS) At This P/E Ratio?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how DICK'S Sporting Goods, Inc.'s (NYSE:DKS) P/E ratio could help you assess the value on offer. Based on the last twelve months, DICK'S Sporting Goods's P/E ratio is 12.11. That is equivalent to an earnings yield of about 8.3%.

See our latest analysis for DICK'S Sporting Goods

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for DICK'S Sporting Goods:

P/E of 12.11 = $40.43 ÷ $3.34 (Based on the trailing twelve months to August 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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does DICK'S Sporting Goods Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see DICK'S Sporting Goods has a lower P/E than the average (15.7) in the specialty retail industry classification.

NYSE:DKS Price Estimation Relative to Market, October 23rd 2019
NYSE:DKS Price Estimation Relative to Market, October 23rd 2019

This suggests that market participants think DICK'S Sporting Goods will underperform other companies in its industry. Since the market seems unimpressed with DICK'S Sporting Goods, 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

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DICK'S Sporting Goods increased earnings per share by 2.9% last year. And earnings per share have improved by 4.4% annually, over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

So What Does DICK'S Sporting Goods's Balance Sheet Tell Us?

Net debt totals just 8.9% of DICK'S Sporting Goods's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On DICK'S Sporting Goods's P/E Ratio

DICK'S Sporting Goods's P/E is 12.1 which is below average (17.8) in the US market. The company does have a little debt, and EPS is moving in the right direction. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 DICK'S Sporting Goods. 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).

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.