Yahoo Finance Here's What Mohawk Industries, Inc.'s (NYSE:MHK) P/E Is Telling Us
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Mohawk Industries, Inc.'s (NYSE:MHK) P/E ratio and reflect on what it tells us about the company's share price. Mohawk Industries has a price to earnings ratio of 14.07, based on the last twelve months. That is equivalent to an earnings yield of about 7.1%.
View our latest analysis for Mohawk Industries
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Mohawk Industries:
P/E of 14.07 = $136.67 ÷ $9.71 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
How Does Mohawk Industries'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 Mohawk Industries has a P/E ratio that is fairly close for the average for the consumer durables industry, which is 14.1.
Its P/E ratio suggests that Mohawk Industries shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Mohawk Industries actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Mohawk Industries shrunk earnings per share by 17% over the last year. But over the longer term (5 years) earnings per share have increased by 7.4%. And over the longer term (3 years) earnings per share have decreased 6.8% annually. This might lead to low expectations.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Mohawk Industries's Balance Sheet Tell Us?
Net debt is 28% of Mohawk Industries's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Mohawk Industries's P/E Ratio
Mohawk Industries trades on a P/E ratio of 14.1, which is below the US market average of 18.4. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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 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.
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.
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.
