Yahoo Finance Why The Food Revolution Group Limited’s (ASX:FOD) High P/E Ratio Isn’t Necessarily A Bad Thing
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 The Food Revolution Group Limited’s (ASX:FOD) P/E ratio could help you assess the value on offer. Based on the last twelve months, Food Revolution Group’s P/E ratio is 32.24. That means that at current prices, buyers pay A$32.24 for every A$1 in trailing yearly profits.
Check out our latest analysis for Food Revolution Group
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 Food Revolution Group:
P/E of 32.24 = A$0.17 ÷ A$0.0051 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each A$1 the company has earned over the last year. 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. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Food Revolution Group increased earnings per share by an impressive 19% over the last twelve months. And its annual EPS growth rate over 5 years is 89%. This could arguably justify a relatively high P/E ratio.
How Does Food Revolution Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Food Revolution Group has a higher P/E than the average (20.4) P/E for companies in the food industry.
That means that the market expects Food Revolution Group will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Food Revolution Group’s Balance Sheet
Food Revolution Group’s net debt is 2.4% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Food Revolution Group’s P/E Ratio
Food Revolution Group trades on a P/E ratio of 32.2, which is above the AU market average of 15.1. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. Therefore it seems reasonable that the market would have relatively high expectations of the company
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.’ We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Food Revolution Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
