Yahoo Finance Do You Know What Incitec Pivot Limited's (ASX:IPL) P/E Ratio Means?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Incitec Pivot Limited's (ASX:IPL) P/E ratio to inform your assessment of the investment opportunity. Incitec Pivot has a P/E ratio of 23.32, based on the last twelve months. In other words, at today's prices, investors are paying A$23.32 for every A$1 in prior year profit.
See our latest analysis for Incitec Pivot
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Incitec Pivot:
P/E of 23.32 = A$3.46 ÷ A$0.15 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does Incitec Pivot'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 (30.9) for companies in the chemicals industry is higher than Incitec Pivot's P/E.
Incitec Pivot's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It's nice to see that Incitec Pivot grew EPS by a stonking 43% in the last year. But earnings per share are down 8.4% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
Incitec Pivot's Balance Sheet
Incitec Pivot has net debt equal to 40% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Incitec Pivot's P/E Ratio
Incitec Pivot's P/E is 23.3 which is above average (16.3) in its market. While the company does use modest debt, its recent earnings growth is superb. So to be frank we are not surprised it has a high P/E ratio.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Incitec Pivot may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
