Yahoo Finance Why James Hardie Industries plc’s (ASX:JHX) High P/E Ratio Isn’t Necessarily A Bad Thing
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at James Hardie Industries plc’s (ASX:JHX) P/E ratio and reflect on what it tells us about the company’s share price. James Hardie Industries has a price to earnings ratio of 33.14, based on the last twelve months. That is equivalent to an earnings yield of about 3.0%.
See our latest analysis for James Hardie Industries
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for James Hardie Industries:
P/E of 33.14 = $12.78 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.39 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each A$1 the company has earned over the last year. 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
When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
James Hardie Industries shrunk earnings per share by 31% over the last year. But EPS is up 7.2% over the last 5 years. And EPS is down 13% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
How Does James Hardie Industries’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 Hardie Industries has a higher P/E than the average (16) P/E for companies in the basic materials industry.
James Hardie Industries’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
Is Debt Impacting James Hardie Industries’s P/E?
James Hardie Industries has net debt worth 21% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On James Hardie Industries’s P/E Ratio
James Hardie Industries trades on a P/E ratio of 33.1, which is above the AU market average of 15.8. 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. 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 be able to find a better stock than James Hardie Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
