Yahoo Finance Do You Know What Cactus, Inc.'s (NYSE:WHD) P/E Ratio Means?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Cactus, Inc.'s (NYSE:WHD) P/E ratio and reflect on what it tells us about the company's share price. Cactus has a P/E ratio of 14.24, based on the last twelve months. In other words, at today's prices, investors are paying $14.24 for every $1 in prior year profit.
Check out our latest analysis for Cactus
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 Cactus:
P/E of 14.24 = $29.46 ÷ $2.07 (Based on the year to June 2019.)
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 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.
How Does Cactus's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (18.7) for companies in the energy services industry is higher than Cactus's P/E.
This suggests that market participants think Cactus will underperform other companies in its industry. Since the market seems unimpressed with Cactus, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Cactus's earnings per share fell by 67% in the last twelve months. And it has shrunk its earnings per share by 63% per year over the last five years. This could justify a pessimistic P/E.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Cactus's Debt Impact Its P/E Ratio?
Since Cactus holds net cash of US$117m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Cactus's P/E Ratio
Cactus trades on a P/E ratio of 14.2, which is below the US market average of 17.5. Falling earnings per share are likely to be keeping potential buyers away, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Cactus. 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.
