The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at TriMas Corporation’s (NASDAQ:TRS) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, TriMas’s P/E ratio is 17.65. That corresponds to an earnings yield of approximately 5.7%.
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 TriMas:
P/E of 17.65 = $32.08 ÷ $1.82 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that TriMas grew EPS by a stonking 168% in the last year. And earnings per share have improved by 97% annually, over the last three years. So we’d generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 12% a year, over 5 years.
How Does TriMas’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see TriMas has a lower P/E than the average (20.8) in the machinery industry classification.
TriMas’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with TriMas, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. 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.
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).
How Does TriMas’s Debt Impact Its P/E Ratio?
TriMas has net debt worth 13% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On TriMas’s P/E Ratio
TriMas has a P/E of 17.6. That’s around the same as the average in the US market, which is 17.7. Given it has reasonable debt levels, and grew earnings strongly last year, the P/E indicates the market has doubts this growth can be sustained.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: TriMas may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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.