The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Carnival Corporation & Plc's (NYSE:CCL) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Carnival Corporation & has a P/E ratio of 11.59. That corresponds to an earnings yield of approximately 8.6%.
How Do You Calculate Carnival Corporation &'s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Carnival Corporation &:
P/E of 11.59 = USD50.21 ÷ USD4.33 (Based on the year to November 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each USD1 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 Carnival Corporation & Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Carnival Corporation & has a lower P/E than the average (25.1) in the hospitality industry classification.
Carnival Corporation &'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Carnival Corporation &'s earnings per share fell by 2.5% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 23%.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 Carnival Corporation &'s Debt Impact Its P/E Ratio?
Net debt is 33% of Carnival Corporation &'s market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Carnival Corporation &'s P/E Ratio
Carnival Corporation &'s P/E is 11.6 which is below average (18.9) in the US market. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Carnival Corporation &. 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).
If you spot an error that warrants correction, please contact the editor at email@example.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.