Yahoo Finance Should You Be Tempted To Sell Spirax-Sarco Engineering plc (LON:SPX) Because Of Its P/E Ratio?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Spirax-Sarco Engineering plc’s (LON:SPX) P/E ratio could help you assess the value on offer. Spirax-Sarco Engineering has a price to earnings ratio of 26.01, based on the last twelve months. That corresponds to an earnings yield of approximately 3.8%.
Check out our latest analysis for Spirax-Sarco Engineering
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Spirax-Sarco Engineering:
P/E of 26.01 = £61.6 ÷ £2.37 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each £1 the company has earned over the last year. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in 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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Notably, Spirax-Sarco Engineering grew EPS by a whopping 33% in the last year. And its annual EPS growth rate over 5 years is 11%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Spirax-Sarco Engineering’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, Spirax-Sarco Engineering has a higher P/E than the average company (18) in the machinery industry.
Its relatively high P/E ratio indicates that Spirax-Sarco Engineering shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. 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).
How Does Spirax-Sarco Engineering’s Debt Impact Its P/E Ratio?
Spirax-Sarco Engineering’s net debt is 8.2% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Spirax-Sarco Engineering’s P/E Ratio
Spirax-Sarco Engineering’s P/E is 26 which is above average (15) in the GB market. While the company does use modest debt, its recent earnings growth is impressive. Therefore it seems reasonable that the market would have relatively high expectations of the company
Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than Spirax-Sarco Engineering. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
