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Should We Worry About James Fisher and Sons plc’s (LON:FSJ) P/E Ratio?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at James Fisher and Sons plc’s (LON:FSJ) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, James Fisher and Sons’s P/E ratio is 21.41. That is equivalent to an earnings yield of about 4.7%.

Check out our latest analysis for James Fisher and Sons

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 James Fisher and Sons:

P/E of 21.41 = £19.16 ÷ £0.90 (Based on the year to December 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 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

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

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Most would be impressed by James Fisher and Sons earnings growth of 12% in the last year. And it has bolstered its earnings per share by 1.8% per year over the last five years. With that performance, you might expect an above average P/E ratio.

How Does James Fisher and Sons’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that James Fisher and Sons has a higher P/E than the average (18.2) P/E for companies in the infrastructure industry.

LSE:FSJ Price Estimation Relative to Market, February 28th 2019
LSE:FSJ Price Estimation Relative to Market, February 28th 2019

James Fisher and Sons’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don’t forget that the P/E ratio considers market capitalization. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does James Fisher and Sons’s Debt Impact Its P/E Ratio?

James Fisher and Sons has net debt worth 12% of its market capitalization. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Verdict On James Fisher and Sons’s P/E Ratio

James Fisher and Sons’s P/E is 21.4 which is above average (16.2) in the GB market. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. Therefore it seems reasonable that the market would have relatively high expectations of the company

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 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.

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.