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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Eddie Stobart Logistics plc's (LON:ESL) P/E ratio to inform your assessment of the investment opportunity. What is Eddie Stobart Logistics's P/E ratio? Well, based on the last twelve months it is 16.94. That means that at current prices, buyers pay £16.94 for every £1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Eddie Stobart Logistics:
P/E of 16.94 = £0.75 ÷ £0.044 (Based on the trailing twelve months to November 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each £1 of company 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Eddie Stobart Logistics's 265% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 40% per year over three years. So you might say it really deserves to have an above-average P/E ratio.
How Does Eddie Stobart Logistics's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Eddie Stobart Logistics has a higher P/E than the average company (9.1) in the transportation industry.
That means that the market expects Eddie Stobart Logistics 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.
Remember: P/E Ratios Don't Consider The Balance Sheet
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).
Eddie Stobart Logistics's Balance Sheet
Net debt totals 56% of Eddie Stobart Logistics's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Eddie Stobart Logistics's P/E Ratio
Eddie Stobart Logistics's P/E is 16.9 which is about average (16.4) in the GB market. The significant levels of debt do detract somewhat from the strong earnings growth. The P/E suggests the market isn't confident that growth will be sustained, though.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Eddie Stobart Logistics. 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 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. Thank you for reading.