Yahoo Finance Despite Its High P/E Ratio, Is Ultra Electronics Holdings plc (LON:ULE) Still Undervalued?
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 Ultra Electronics Holdings plc's (LON:ULE) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Ultra Electronics Holdings's P/E ratio is 37.01. In other words, at today's prices, investors are paying £37.01 for every £1 in prior year profit.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
See our latest analysis for Ultra Electronics Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Ultra Electronics Holdings:
P/E of 37.01 = £16.12 ÷ £0.44 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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
Earnings growth rates have a big influence on P/E ratios. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Ultra Electronics Holdings shrunk earnings per share by 34% over the last year. But over the longer term (3 years), earnings per share have increased by 6.9%. And it has shrunk its earnings per share by 4.5% per year over the last five years. This could justify a pessimistic P/E.
How Does Ultra Electronics Holdings's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Ultra Electronics Holdings has a higher P/E than the average (23) P/E for companies in the aerospace & defense industry.
That means that the market expects Ultra Electronics Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Ultra Electronics Holdings's Debt Impact Its P/E Ratio?
Net debt totals 14% of Ultra Electronics Holdings's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Bottom Line On Ultra Electronics Holdings's P/E Ratio
Ultra Electronics Holdings trades on a P/E ratio of 37, which is above the GB market average of 16.4. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Ultra Electronics Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
