Yahoo Finance Is Brady Corporation's (NYSE:BRC) P/E Ratio Really That Good?
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 Brady Corporation's (NYSE:BRC) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Brady has a P/E ratio of 21.34. That is equivalent to an earnings yield of about 4.7%.
See our latest analysis for Brady
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Brady:
P/E of 21.34 = $52.92 ÷ $2.48 (Based on the year to July 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Brady Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Brady has a lower P/E than the average (25.8) in the commercial services industry classification.
This suggests that market participants think Brady will underperform other companies in its industry. Since the market seems unimpressed with Brady, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. 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.
Brady increased earnings per share by a whopping 42% last year. And it has improved its earnings per share by 16% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Brady's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Brady's US$229m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Brady's P/E Ratio
Brady trades on a P/E ratio of 21.3, which is above its market average of 17.8. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).
Investors should be looking to buy stocks that the market is wrong about. 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.
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.
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.