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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at BJ's Restaurants, Inc.'s (NASDAQ:BJRI) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, BJ's Restaurants has a P/E ratio of 18.22. In other words, at today's prices, investors are paying $18.22 for every $1 in prior year profit.
View our latest analysis for BJ's Restaurants
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 BJ's Restaurants:
P/E of 18.22 = $42.37 ÷ $2.33 (Based on the year to April 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 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
BJ's Restaurants shrunk earnings per share by 2.4% last year. But EPS is up 30% over the last 5 years.
Does BJ's Restaurants Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (22.4) for companies in the hospitality industry is higher than BJ's Restaurants's P/E.
BJ's Restaurants's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.