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# Why Stanley Black & Decker, Inc.’s (NYSE:SWK) High P/E Ratio Isn’t Necessarily A Bad Thing

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Stanley Black & Decker, Inc.’s (NYSE:SWK) P/E ratio and reflect on what it tells us about the company’s share price. Stanley Black & Decker has a price to earnings ratio of 29.27, based on the last twelve months. That means that at current prices, buyers pay \$29.27 for every \$1 in trailing yearly profits.

### How Do You Calculate Stanley Black & Decker’s P/E Ratio?

The formula for P/E is:

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

Or for Stanley Black & Decker:

P/E of 29.27 = \$126.82 ÷ \$4.33 (Based on the trailing twelve months to December 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 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

When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

Stanley Black & Decker shrunk earnings per share by 47% over the last year. But it has grown its earnings per share by 10% per year over the last five years. And it has shrunk its earnings per share by 1.6% per year over the last three years. This growth rate might warrant a low P/E ratio. This might lead to low expectations.

### How Does Stanley Black & Decker’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Stanley Black & Decker has a higher P/E than the average company (18.8) in the machinery industry.

Stanley Black & Decker’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

### Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

### Stanley Black & Decker’s Balance Sheet

Net debt totals 20% of Stanley Black & Decker’s market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

### The Bottom Line On Stanley Black & Decker’s P/E Ratio

Stanley Black & Decker’s P/E is 29.3 which is above average (16.8) in the US market. 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.

Of course you might be able to find a better stock than Stanley Black & Decker. So you may wish to see this free collection of other companies that have grown earnings strongly.

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 editorial-team@simplywallst.com.