Thetim mcgraw omaha tickets 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 Park Lawn Corporation’s (

TSE:PLC

) P/E ratio could help you assess the value on offer.

Park Lawn has a price to earnings ratio of 62.48

, based on the last twelve months. That corresponds to an earnings yield of approximately 1.6%.

See our latest analysis for Park Lawn

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 Park Lawn:

P/E of 62.48 = CA$22.66 ÷ CA$0.36 (Based on the trailing twelve months to September 2018.)

Is A High P/E 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Park Lawn saw earnings per share decrease by 31% last year. And it has shrunk its earnings per share by 8.3% per year over the last five years. This might lead to muted expectations.

How Does Park Lawn’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Park Lawn has a significantly higher P/E than the average (19.2) P/E for companies in the consumer services industry.

TSX:PLC PE PEG Gauge January 1st 19

That means that the market expects Park Lawn will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. 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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting Park Lawn’s P/E?

Net debt totals just 9.3% of Park Lawn’s market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

Story continues

The Bottom Line On Park Lawn’s P/E Ratio

Park Lawn’s P/E is 62.5 which is way above average (13.1) in the CA market. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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 Park Lawn. 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

[email protected]

.

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