The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Corby Spirit and Wine Limited’s (TSE:CSW.A) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Corby Spirit and Wine’s P/E ratio is 16.95. In other words, at today’s prices, investors are paying CA$16.95 for every CA$1 in prior year profit.
See our latest analysis for Corby Spirit and Wine
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Corby Spirit and Wine:
P/E of 16.95 = CA$15.840 ÷ CA$0.934 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CA$1 the company has earned over the last year. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Corby Spirit and Wine 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. We can see in the image below that the average P/E (26.9) for companies in the beverage industry is higher than Corby Spirit and Wine’s P/E.
TSX:CSW.A Price Estimation Relative to Market April 21st 2020
Its relatively low P/E ratio indicates that Corby Spirit and Wine shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Corby Spirit and Wine’s earnings per share fell by 3.0% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 5.2%.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
Corby Spirit and Wine’s Balance Sheet
With net cash of CA$68m, Corby Spirit and Wine has a very strong balance sheet, which may be important for its business. Having said that, at 15% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Corby Spirit and Wine’s P/E Ratio
Corby Spirit and Wine’s P/E is 17.0 which is above average (11.8) in its market. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
Investors should be looking to buy stocks that the market is wrong about. 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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Corby Spirit and Wine. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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