Yahoo Finance Here's How P/E Ratios Can Help Us Understand Ashtead Group plc (LON:AHT)
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Ashtead Group plc's (LON:AHT), to help you decide if the stock is worth further research. Based on the last twelve months, Ashtead Group's P/E ratio is 14.07. In other words, at today's prices, investors are paying £14.07 for every £1 in prior year profit.
View our latest analysis for Ashtead Group
How Do You Calculate Ashtead Group's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Ashtead Group:
P/E of 14.07 = £21.53 ÷ £1.53 (Based on the year to January 2019.)
Is A High P/E 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Ashtead Group shrunk earnings per share by 23% over the last year. But it has grown its earnings per share by 29% per year over the last five years.
How Does Ashtead Group's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (16.1) for companies in the trade distributors industry is higher than Ashtead Group's P/E.
Its relatively low P/E ratio indicates that Ashtead Group shareholders think it will struggle to do as well as other companies in its industry classification. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
Ashtead Group's Balance Sheet
Ashtead Group's net debt equates to 37% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Ashtead Group's P/E Ratio
Ashtead Group trades on a P/E ratio of 14.1, which is below the GB market average of 16.2. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Ashtead Group. 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.
