In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Carr's Group plc's (LON:CARR) P/E ratio to inform your assessment of the investment opportunity. What is Carr's Group's P/E ratio? Well, based on the last twelve months it is 11.08. That corresponds to an earnings yield of approximately 9.0%.
View our latest analysis for Carr's Group
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 Carr's Group:
P/E of 11.08 = £1.38 ÷ £0.12 (Based on the trailing twelve months to March 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. 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 Does Carr's Group's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Carr's Group has a lower P/E than the average (16.9) in the food industry classification.
Carr's Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Carr's Group, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
It's great to see that Carr's Group grew EPS by 21% in the last year. And it has improved its earnings per share by 15% per year over the last three years. So one might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).