This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Atmos Energy Corporation’s (NYSE:ATO) P/E ratio and reflect on what it tells us about the company’s share price. Atmos Energy has a price to earnings ratio of 25.88, based on the last twelve months. That means that at current prices, buyers pay $25.88 for every $1 in trailing yearly profits.
How Do I Calculate Atmos Energy’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Atmos Energy:
P/E of 25.88 = $110.23 ÷ $4.26 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Atmos Energy Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (25.6) for companies in the gas utilities industry is roughly the same as Atmos Energy’s P/E.
Its P/E ratio suggests that Atmos Energy shareholders think that in the future it will perform about the same as other companies in its industry classification.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Atmos Energy saw earnings per share decrease by 22% last year. But EPS is up 8.2% over the last 5 years.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Atmos Energy’s Debt Impact Its P/E Ratio?
Atmos Energy has net debt equal to 28% of its market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Bottom Line On Atmos Energy’s P/E Ratio
Atmos Energy has a P/E of 25.9. That’s higher than the average in its market, which is 17.3. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors have an opportunity when market expectations about a stock are wrong. 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.
You might be able to find a better buy than Atmos Energy. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 email@example.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.