This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Harley-Davidson, Inc.’s (NYSE:HOG) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Harley-Davidson’s P/E ratio is 10.83. That is equivalent to an earnings yield of about 9.2%.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Harley-Davidson:
P/E of 10.83 = $34.93 ÷ $3.23 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Harley-Davidson maintained roughly steady earnings over the last twelve months. And over the longer term (5 years) earnings per share have decreased 3.1% annually. So you wouldn’t expect a very high P/E.
How Does Harley-Davidson’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (9.9) for companies in the auto industry is lower than Harley-Davidson’s P/E.
That means that the market expects Harley-Davidson will outperform other companies in its industry. 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Harley-Davidson’s Balance Sheet
Net debt totals a substantial 112% of Harley-Davidson’s market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Harley-Davidson’s P/E Ratio
Harley-Davidson’s P/E is 10.8 which is below average (17) in the US market. It’s good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations.
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.
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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.