Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Keurig Dr Pepper Inc.'s (NYSE:KDP) P/E ratio could help you assess the value on offer. Based on the last twelve months, Keurig Dr Pepper's P/E ratio is 38.28. That corresponds to an earnings yield of approximately 2.6%.
How Do You Calculate Keurig Dr Pepper's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Keurig Dr Pepper:
P/E of 38.28 = $30.37 ÷ $0.79 (Based on the trailing twelve months to September 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Keurig Dr Pepper Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Keurig Dr Pepper has a higher P/E than the average company (28.9) in the beverage industry.
Keurig Dr Pepper's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Keurig Dr Pepper's earnings per share fell by 71% in the last twelve months. But EPS is up 15% over the last 3 years. And EPS is down 27% a year, over the last 5 years. This could justify a pessimistic P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Keurig Dr Pepper's Balance Sheet
Keurig Dr Pepper has net debt equal to 35% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Keurig Dr Pepper's P/E Ratio
Keurig Dr Pepper has a P/E of 38.3. That's higher than the average in its market, which is 18.2. 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 Keurig Dr Pepper. 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).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.