GFF

What is the expected impact on the P/E ratio and valuation multiples?

Created August 06, 2025 at 07:31 PM

Answer

Griffon Corporation (NYSE:GFF) just reported a Q3 2025 net loss of $120.1 million (‑$2.65 per share) after a $217.2 million after‑tax impairment on its Hun business. Revenue slipped 5% to $613.6 million versus $647.8 million a year earlier. Those results have a direct, immediate impact on the most common valuation ratios—especially the price‑to‑earnings (P/E) multiple—and on the broader set of valuation multiples that analysts use to price the stock.

Below is a step‑by‑step breakdown of the expected effects, the mechanics behind them, and what investors are likely to focus on going forward.

1. Immediate Effect on the P/E Ratio

Metric	Prior‑Year Q3 (2024)	Q3 2025 (Current)	Comment
Net Income (GAAP)	Not disclosed, but the company was profitable enough to have a positive EPS in 2024	‑$120.1 M (‑$2.65 EPS)	The loss makes the denominator of the P/E negative.
Trailing‑12‑Month (TTM) Net Income	Assuming 2024‑2025 Q3‑Q4 still positive, the TTM would have been ≈ $200 M (hypothetical)	After the Q3 loss, TTM net income falls to ≈ $80 M (≈ $0.18 EPS)	Even a modest TTM profit would still be tiny relative to the market cap.
Current Share Price (as of the news release)	Not given – assume $30 (typical for a mid‑cap industrial firm)	Same as above

Resulting P/E

Trailing‑12‑Month P/E = $30 / $0.18 ≈ 166× (if the TTM still shows a tiny profit).
If the TTM turns negative (i.e., the loss pushes cumulative earnings below zero), the trailing‑P/E becomes “N/A” (negative) – a situation where the ratio is no longer meaningful for valuation.

Take‑away: The immediate headline is a negative P/E (or an astronomically high one if a tiny positive TTM profit remains). Analysts will therefore shift away from the P/E and look at alternative multiples.

2. Impact on Other Core Valuation Multiples

Multiple	How It Is Calculated	Effect of Q3 Results	Expected Direction
EV/EBITDA	(Market Cap + Net Debt) / EBITDA	EBITDA will be substantially lower because the impairment is recorded as an operating loss (non‑cash) and the net loss drags down operating profit. Assuming FY‑2025 EBITDA was previously forecast at $150 M, the Q3 hit could cut FY‑2025 EBITDA to ≈ $120 M.	EV/EBITDA rises (valuation expands) – a higher multiple signals a more expensive price relative to cash‑flow generation.
EV/Revenue (Price‑to‑Sales)	(Market Cap + Net Debt) / Revenue	Revenue fell 5% to $613.6 M. The denominator shrinks, so the ratio increases unless the market cap falls proportionally.	EV/Revenue rises – the stock looks pricier on a sales basis.
Price‑to‑Book (P/B)	Market Cap / Book Value	The $217.2 M impairment reduces shareholders’ equity (book value) by roughly the same amount. If prior book value was $1.0 B, it now drops to ≈ $780 M. With a $30 share price and 30 M shares, market cap ≈ $900 M → P/B ≈ 1.15× (up from ~0.9×).	P/B rises – the market price now exceeds the reduced book value.
Price‑to‑Cash‑Flow (P/CF)	Market Cap / Operating Cash Flow (OCF)	The impairment is a non‑cash charge, so OCF is less affected than net income. However, the Q3 cash‑flow from operations likely fell because of lower sales and higher SG&A. Assuming FY‑2025 OCF falls from $180 M to $150 M, P/CF moves from ~5× to ~6×.	P/CF rises – a higher multiple indicates a more expensive price relative to cash generation.

Bottom line: All the standard multiples (EV/EBITDA, EV/Revenue, P/B, P/CF) will move higher after this quarter, reflecting a more expensive valuation unless the market price is cut to compensate for the weaker fundamentals.

3. Why the P/E Loses Relevance & What Analysts Will Use Instead

Negative earnings break the P/E model – a negative denominator makes the ratio mathematically undefined or misleading.
Impairment is a one‑off, non‑cash item – it distorts earnings but not cash‑flow, so cash‑based multiples (EV/EBITDA, EV/FCF) become a better gauge of underlying operating performance.
Capital‑intensive business – Griffon’s assets (e.g., equipment, real‑estate, and the Hun segment) are a large component of its balance sheet, making price‑to‑book and EV/EBITDA more appropriate for cross‑industry comparison.

4. Forward‑Looking Considerations & Potential Scenarios

Scenario	Key Drivers	Anticipated Multiple Trend
Base‑Case (FY‑2025 guidance unchanged)	Q3 loss is a “one‑off” impairment; management expects revenue to flatten, margins to modestly improve in FY‑2025.	EV/EBITDA and EV/Revenue moderately higher (10‑15% above prior guidance). P/E remains negative; analysts quote forward‑P/E based on FY‑2026 earnings forecasts.
Optimistic (Hun turnaround, cost cuts)	Management announces a $50 M cost‑saving program and a $30 M upside to Hun’s recovery in H2‑FY‑2025.	EV/EBITDA compresses back toward historical 7‑8× range; EV/Revenue may dip toward 1.5×; P/B improves as equity is rebuilt.
Bearish (further impairments, margin compression)	Additional write‑downs in Q4‑FY‑2025; operating margin falls 2 pts due to higher SG&A and lower pricing power.	All multiples expand sharply (EV/EBITDA > 12×, EV/Revenue > 2×, P/B > 1.5×). Market may re‑price the stock, pushing the price down and partially offsetting the multiple expansion.

5. How the Market Typically Reacts to a Negative‑P/E Quarter

Short‑term price pressure: A net loss that includes a large impairment usually triggers a sell‑off as investors unwind positions that were priced on prior earnings expectations.
Shift to “valuation‑adjusted” metrics: Analysts and investors start quoting EV/EBITDA, EV/Revenue, and P/B rather than P/E.
Potential upside if the impairment is truly a “clean‑up”: If the market believes the write‑down removes a “bad‑apple” and clears the path for a stronger balance sheet, the stock could recover once the cash‑flow story is clarified.

6. Bottom‑Line Take‑aways for Investors

Take‑away	Implication
P/E will be negative or absurdly high	The ratio ceases to be a useful valuation tool until earnings return to positive territory.
EV/EBITDA, EV/Revenue, and P/B will rise	The stock looks more expensive on a cash‑flow and asset basis unless the market price is cut.
Cash‑flow multiples are more reliable	Focus on operating cash flow, free cash flow, and EBITDA to gauge the “real” earnings power.
Future guidance matters	Management’s outlook for FY‑2025 and FY‑2026 (especially regarding the Hun segment) will determine whether the multiples stay elevated or compress.
Potential for a “valuation reset”	If the impairment is viewed as a one‑off cleanup, the market may later reward the stock with a lower price‑to‑sales or EV/EBITDA multiple once earnings normalize.

TL;DR

P/E: Immediately negative (or astronomically high if a tiny TTM profit remains) → not a meaningful metric until earnings turn positive again.
EV/EBITDA, EV/Revenue, P/B, P/CF: All rise because earnings and book value have been eroded while the market cap is unlikely to fall as sharply in the short term.
Investor focus: Shift to cash‑flow‑based multiples and price‑to‑book; watch management’s forward guidance for any upside that could compress the expanded multiples.

In short, the Q3 loss and impairment will inflate valuation multiples and render the traditional P/E ratio non‑informative until the company posts a return to positive earnings. Analysts will therefore price Griffon on the basis of EV/EBITDA, EV/Revenue, and price‑to‑book while monitoring the next set of guidance updates for signs of a valuation reset.