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A Sliding Share Price Has Us Looking At Restaurant Brands International Inc.'s (NYSE:QSR) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Restaurant Brands International (NYSE:QSR) share price has dived 35% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 32% drop over twelve months.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Restaurant Brands International

Does Restaurant Brands International Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 17.87 that there is some investor optimism about Restaurant Brands International. As you can see below, Restaurant Brands International has a higher P/E than the average company (13.6) in the hospitality industry.

NYSE:QSR Price Estimation Relative to Market, March 13th 2020

That means that the market expects Restaurant Brands International will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Restaurant Brands International saw earnings per share decrease by 2.4% last year. But EPS is up 17% over the last 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Restaurant Brands International's P/E?

Restaurant Brands International's net debt equates to 47% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Restaurant Brands International's P/E Ratio

Restaurant Brands International has a P/E of 17.9. That's higher than the average in its market, which is 13.3. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What can be absolutely certain is that the market has become significantly less optimistic about Restaurant Brands International over the last month, with the P/E ratio falling from 27.6 back then to 17.9 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Restaurant Brands International. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.