Should We Worry About Wilhelmina International, Inc.’s (NASDAQ:WHLM) P/E Ratio?

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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Wilhelmina International, Inc.’s (NASDAQ:WHLM) P/E ratio and reflect on what it tells us about the company’s share price. Wilhelmina International has a P/E ratio of 62.05, based on the last twelve months. That means that at current prices, buyers pay $62.05 for every $1 in trailing yearly profits.

View our latest analysis for Wilhelmina International

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Wilhelmina International:

P/E of 62.05 = $6.13 ÷ $0.099 (Based on the year to March 2019.)

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 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

If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

It’s nice to see that Wilhelmina International grew EPS by a stonking 40% in the last year. Unfortunately, earnings per share are down 31% a year, over 5 years.

Does Wilhelmina International Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Wilhelmina International has a higher P/E than the average company (24.9) in the commercial services industry.

NasdaqCM:WHLM Price Estimation Relative to Market, June 26th 2019
NasdaqCM:WHLM Price Estimation Relative to Market, June 26th 2019

Wilhelmina International’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. 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).

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.

Is Debt Impacting Wilhelmina International’s P/E?

With net cash of US$3.6m, Wilhelmina International has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Wilhelmina International’s P/E Ratio

With a P/E ratio of 62.1, Wilhelmina International is expected to grow earnings very strongly in the years to come. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Wilhelmina International. 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.