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Thehow many calories should i be eating after gastric sleeve goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at McDonald’s Corporation’s ( NYSE:MCD
) P/E ratio and reflect on what it tells us about the company’s share price.
McDonald’s has a price to earnings ratio of 26.45
, based on the last twelve months. In other words, at today’s prices, investors are paying $26.45 for every $1 in prior year profit. Check out our latest analysis for McDonald’s How Do You Calculate McDonald’s’s P/E Ratio? The formula for price to earnings is: Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS) Or for McDonald’s: P/E of 26.45 = $175.56 ÷ $6.64 (Based on the year 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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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. McDonald’s’s earnings per share fell by 4.9% in the last twelve months. But it has grown its earnings per share by 6.1% per year over the last five years. How Does McDonald’s’s P/E Ratio Compare To Its Peers? The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, McDonald’s has a higher P/E than the average company (15.9) in the hospitality industry. NYSE:MCD PE PEG Gauge January 2nd 19 That means that the market expects McDonald’s will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling . 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. That means it doesn’t take debt or cash into account. 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. Story continues Is Debt Impacting McDonald’s’s P/E? Net debt totals 22% of McDonald’s’s market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt. The Verdict On McDonald’s’s P/E Ratio McDonald’s trades on a P/E ratio of 26.4, which is above the US market average of 16. With some debt but no EPS growth last year, the market has high expectations of future profits. Investors have an opportunity when market expectations about a stock are wrong. 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.’ So this free visual report on analyst forecasts could hold they key to an excellent investment decision. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20. 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 . View comments |
