Yahoo Finance Why Orora Limited's (ASX:ORA) High P/E Ratio Isn't Necessarily A Bad Thing
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 Orora Limited's (ASX:ORA) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Orora's P/E ratio is 17.52. That means that at current prices, buyers pay A$17.52 for every A$1 in trailing yearly profits.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Check out our latest analysis for Orora
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Orora:
P/E of 17.52 = A$3.22 ÷ A$0.18 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by Orora earnings growth of 20% in the last year. And it has improved its earnings per share by 14% per year over the last three years. So one might expect an above average P/E ratio.
How Does Orora'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. The image below shows that Orora has a higher P/E than the average (14.2) P/E for companies in the packaging industry.
Its relatively high P/E ratio indicates that Orora shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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 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 Orora's Debt Impact Its P/E Ratio?
Orora's net debt is 22% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Orora's P/E Ratio
Orora trades on a P/E ratio of 17.5, which is above the AU market average of 16.2. While the company does use modest debt, its recent earnings growth is very good. So on this analysis it seems reasonable that its P/E ratio is above average.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
