Here's How P/E Ratios Can Help Us Understand Matthews International Corporation (NASDAQ:MATW)

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 Matthews International Corporation's (NASDAQ:MATW) P/E ratio to inform your assessment of the investment opportunity. What is Matthews International's P/E ratio? Well, based on the last twelve months it is 16.28. That is equivalent to an earnings yield of about 6.1%.

Check out our latest analysis for Matthews International

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 Matthews International:

P/E of 16.28 = $32.41 ÷ $1.99 (Based on the year to June 2019.)

Is A High Price-to-Earnings 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 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 Does Matthews International's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Matthews International has a lower P/E than the average (22.6) in the commercial services industry classification.

Matthews International's P/E tells us that market participants think it will not fare as well as its peers in the same industry.

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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Matthews International shrunk earnings per share by 35% over the last year. But it has grown its earnings per share by 1.1% per year over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 Matthews International's Debt Impact Its P/E Ratio?

Matthews International has net debt worth 93% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Matthews International's P/E Ratio

Matthews International has a P/E of 16.3. That's around the same as the average in the US market, which is 17.6. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.