The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Pitney Bowes Inc.’s (NYSE:PBI) P/E ratio and reflect on what it tells us about the company’s share price. Pitney Bowes has a price to earnings ratio of 6.42, based on the last twelve months. That is equivalent to an earnings yield of about 16%.
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 Pitney Bowes:
P/E of 6.42 = $6.85 ÷ $1.07 (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 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Pitney Bowes’s earnings per share fell by 10% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 11% annually. This might lead to muted expectations.
How Does Pitney Bowes’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Pitney Bowes has a lower P/E than the average (20) P/E for companies in the commercial services industry.
This suggests that market participants think Pitney Bowes will underperform other companies in its industry. Since the market seems unimpressed with Pitney Bowes, 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Pitney Bowes’s Balance Sheet
Net debt totals a substantial 181% of Pitney Bowes’s market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On Pitney Bowes’s P/E Ratio
Pitney Bowes has a P/E of 6.4. That’s below the average in the US market, which is 17.6. When you consider that the company has significant debt, and didn’t grow EPS last year, it isn’t surprising that the market has muted expectations.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Pitney Bowes 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).
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 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.