In This Article:
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 Bloomin’ Brands, Inc.’s (NASDAQ:BLMN) P/E ratio to inform your assessment of the investment opportunity. Bloomin’ Brands has a P/E ratio of 16.9, based on the last twelve months. That corresponds to an earnings yield of approximately 5.9%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bloomin’ Brands:
P/E of 16.9 = $19.69 ÷ $1.17 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that Bloomin’ Brands grew EPS by a stonking 35% in the last year. And it has improved its earnings per share by 14% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 7.7% a year, over 5 years.
How Does Bloomin’ Brands’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Bloomin’ Brands has a P/E ratio that is fairly close for the average for the hospitality industry, which is 17.3.
Its P/E ratio suggests that Bloomin’ Brands shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.