Yahoo Finance Read This Before You Buy Incitec Pivot Limited (ASX:IPL) 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). We'll show how you can use Incitec Pivot Limited's (ASX:IPL) P/E ratio to inform your assessment of the investment opportunity. What is Incitec Pivot's P/E ratio? Well, based on the last twelve months it is 33.49. That corresponds to an earnings yield of approximately 3.0%.
View our latest analysis for Incitec Pivot
How Do You Calculate A P/E 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 33.49 = A$3.17 ÷ A$0.09 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each A$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 Does Incitec Pivot's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (38.5) for companies in the chemicals industry is higher than Incitec Pivot's P/E.
This suggests that market participants think Incitec Pivot will underperform other companies in its industry. Since the market seems unimpressed with Incitec Pivot, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Incitec Pivot shrunk earnings per share by 24% over the last year. But it has grown its earnings per share by 7.6% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 8.8% annually. This might lead to muted expectations.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Incitec Pivot's Balance Sheet
Incitec Pivot has net debt equal to 41% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Incitec Pivot's P/E Ratio
Incitec Pivot has a P/E of 33.5. That's higher than the average in its market, which is 18.7. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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).
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.
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. Thank you for reading.
