This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Schweitzer-Mauduit International, Inc.’s (NYSE:SWM) P/E ratio and reflect on what it tells us about the company’s share price. Schweitzer-Mauduit International has a price to earnings ratio of 16.05, based on the last twelve months. That corresponds to an earnings yield of approximately 6.2%.
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 Schweitzer-Mauduit International:
P/E of 16.05 = USD37.93 ÷ USD2.36 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each USD1 of company earnings. 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 Schweitzer-Mauduit International’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (15.3) for companies in the forestry industry is roughly the same as Schweitzer-Mauduit International’s P/E.
Its P/E ratio suggests that Schweitzer-Mauduit International shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Most would be impressed by Schweitzer-Mauduit International earnings growth of 21% in the last year. And it has bolstered its earnings per share by 3.9% per year over the last five years. This could arguably justify a relatively high P/E ratio. In contrast, EPS has decreased by 6.2%, annually, over 3 years.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Schweitzer-Mauduit International’s Balance Sheet Tell Us?
Net debt is 41% of Schweitzer-Mauduit International’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Schweitzer-Mauduit International’s P/E Ratio
Schweitzer-Mauduit International’s P/E is 16.0 which is below average (19.0) in the US market. The company hasn’t stretched its balance sheet, and earnings growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can take a closer look at the fundamentals, here.
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 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 Schweitzer-Mauduit International. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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