What Does Fox Factory Holding Corp.’s (NASDAQ:FOXF) P/E Ratio Tell You?
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Fox Factory Holding Corp.’s (NASDAQ:FOXF) P/E ratio to inform your assessment of the investment opportunity. Fox Factory Holding has a P/E ratio of 35.05, based on the last twelve months. That means that at current prices, buyers pay $35.05 for every $1 in trailing yearly profits.
See our latest analysis for Fox Factory Holding
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Fox Factory Holding:
P/E of 35.05 = $62.03 ÷ $1.77 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Fox Factory Holding increased earnings per share by a whopping 31% last year. And it has bolstered its earnings per share by 21% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Fox Factory Holding’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (12.8) for companies in the auto components industry is lower than Fox Factory Holding’s P/E.
Fox Factory Holding’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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Fox Factory Holding’s P/E?
Fox Factory Holding’s net debt is 1.1% of its 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.
The Verdict On Fox Factory Holding’s P/E Ratio
Fox Factory Holding’s P/E is 35.1 which is above average (17.5) in the US market. While the company does use modest debt, its recent earnings growth is impressive. Therefore it seems reasonable that the market would have relatively high expectations of the company
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Fox Factory Holding. 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 editorial-team@simplywallst.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.
