Why Marriott International, Inc.’s (NASDAQ:MAR) High P/E Ratio Isn’t Necessarily A Bad Thing

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Marriott International, Inc.’s (NASDAQ:MAR) P/E ratio to inform your assessment of the investment opportunity. Marriott International has a P/E ratio of 24.46, based on the last twelve months. That means that at current prices, buyers pay $24.46 for every $1 in trailing yearly profits.

See our latest analysis for Marriott International

How Do I Calculate Marriott International’s Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Marriott International:

P/E of 24.46 = $133.25 ÷ $5.45 (Based on the year to December 2018.)

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. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, Marriott International grew EPS by a whopping 40% in the last year. And its annual EPS growth rate over 5 years is 22%. With that performance, I would expect it to have an above average P/E ratio.

How Does Marriott International’s P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below Marriott International has a P/E ratio that is fairly close for the average for the hospitality industry, which is 24.1.

NasdaqGS:MAR Price Estimation Relative to Market, April 12th 2019
NasdaqGS:MAR Price Estimation Relative to Market, April 12th 2019

That indicates that the market expects Marriott International will perform roughly in line with other companies in its industry. So if Marriott International actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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 Marriott International’s Debt Impact Its P/E Ratio?

Net debt totals 20% of Marriott International’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 Verdict On Marriott International’s P/E Ratio

Marriott International has a P/E of 24.5. That’s higher than the average in the US market, which is 18.1. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So on this analysis a high P/E ratio seems reasonable.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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 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.