Why Unlimited Travel Group UTG AB (publ)’s (STO:UTG) High P/E Ratio Isn’t Necessarily A Bad Thing

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Unlimited Travel Group UTG AB (publ)’s (STO:UTG) P/E ratio and reflect on what it tells us about the company’s share price. Unlimited Travel Group UTG has a price to earnings ratio of 15.36, based on the last twelve months. That is equivalent to an earnings yield of about 6.5%.

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See our latest analysis for Unlimited Travel Group UTG

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Unlimited Travel Group UTG:

P/E of 15.36 = SEK16.2 ÷ SEK1.05 (Based on the trailing twelve months 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 SEK1 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

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Unlimited Travel Group UTG shrunk earnings per share by 39% over the last year. But it has grown its earnings per share by 10% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 25% annually. This could justify a low P/E.

How Does Unlimited Travel Group UTG’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Unlimited Travel Group UTG has a higher P/E than the average (12.2) P/E for companies in the hospitality industry.

OM:UTG Price Estimation Relative to Market, May 24th 2019
OM:UTG Price Estimation Relative to Market, May 24th 2019

Its relatively high P/E ratio indicates that Unlimited Travel Group UTG 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 further research is always essential. I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. 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).

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).

Is Debt Impacting Unlimited Travel Group UTG’s P/E?

With net cash of kr21m, Unlimited Travel Group UTG has a very strong balance sheet, which may be important for its business. Having said that, at 29% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Unlimited Travel Group UTG’s P/E Ratio

Unlimited Travel Group UTG trades on a P/E ratio of 15.4, which is fairly close to the SE market average of 16.3. While the lack of recent growth is probably muting optimism, the healthy balance sheet means the company retains potential for future growth. So it’s not surprising to see it trade on a P/E roughly in line with the market.

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.’ Although we don’t have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than Unlimited Travel Group UTG. 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 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.