This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at American Outdoor Brands Corporation’s (NASDAQ:AOBC) P/E ratio and reflect on what it tells us about the company’s share price. What is American Outdoor Brands’s P/E ratio? Well, based on the last twelve months it is 24.47. That corresponds to an earnings yield of approximately 4.1%.
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 American Outdoor Brands:
P/E of 24.47 = $8.27 ÷ $0.34 (Based on the year to April 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
Does American Outdoor Brands Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (17.7) for companies in the leisure industry is lower than American Outdoor Brands’s P/E.
Its relatively high P/E ratio indicates that American Outdoor Brands shareholders think it will perform better than other companies in its industry classification.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
American Outdoor Brands shrunk earnings per share by 9.2% last year. And EPS is down 26% a year, over the last 5 years. So we might expect a relatively low P/E.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.
American Outdoor Brands’s Balance Sheet
American Outdoor Brands has net debt equal to 25% of its market cap. While it’s worth keeping this in mind, it isn’t a worry.
The Verdict On American Outdoor Brands’s P/E Ratio
American Outdoor Brands’s P/E is 24.5 which is above average (17.4) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: American Outdoor Brands 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 firstname.lastname@example.org. 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.