Yahoo Finance Here’s What Amcor Limited’s (ASX:AMC) P/E Is Telling Us
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 Amcor Limited’s (ASX:AMC) P/E ratio could help you assess the value on offer. Amcor has a price to earnings ratio of 15.55, based on the last twelve months. That is equivalent to an earnings yield of about 6.4%.
See our latest analysis for Amcor
How Do You Calculate Amcor’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Amcor:
P/E of 15.55 = $9.73 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.63 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s great to see that Amcor grew EPS by 21% in the last year. And it has improved its earnings per share by 8.0% per year over the last three years. With that performance, you might expect an above average P/E ratio. But earnings per share are down 1.8% per year over the last five years.
How Does Amcor’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (13.1) for companies in the packaging industry is lower than Amcor’s P/E.
Its relatively high P/E ratio indicates that Amcor shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
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 Amcor’s Debt Impact Its P/E Ratio?
Amcor has net debt worth 34% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Amcor’s P/E Ratio
Amcor has a P/E of 15.5. That’s around the same as the average in the AU market, which is 15.1. When you consider the impressive EPS growth last year (along with some debt), it seems the market has questions about whether rapid EPS growth will be sustained.
Investors have an opportunity when market expectations about a stock are wrong. 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.
You might be able to find a better buy than Amcor. 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.
