Yahoo Finance Is Nordstrom, Inc.'s (NYSE:JWN) P/E Ratio Really That Good?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Nordstrom, Inc.'s (NYSE:JWN) P/E ratio and reflect on what it tells us about the company's share price. What is Nordstrom's P/E ratio? Well, based on the last twelve months it is 11.86. In other words, at today's prices, investors are paying $11.86 for every $1 in prior year profit.
View our latest analysis for Nordstrom
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Nordstrom:
P/E of 11.86 = $36.28 ÷ $3.06 (Based on the year to August 2019.)
Is A High P/E 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.
Does Nordstrom Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Nordstrom has a lower P/E than the average (13.1) in the multiline retail industry classification.
Nordstrom'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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Nordstrom's earnings per share were pretty steady over the last year. But over the longer term (3 years), earnings per share have increased by 8.7%. And EPS is down 4.3% a year, over the last 5 years. So it would be surprising to see a high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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 Nordstrom's Debt Impact Its P/E Ratio?
Nordstrom has net debt equal to 31% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Nordstrom's P/E Ratio
Nordstrom has a P/E of 11.9. That's below the average in the US market, which is 17.6. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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 Nordstrom. 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).
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.
