This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at U.S. Silica Holdings, Inc.’s (NYSE:SLCA) P/E ratio and reflect on what it tells us about the company’s share price. U.S. Silica Holdings has a price to earnings ratio of 7.73, based on the last twelve months. That corresponds to an earnings yield of approximately 13%.
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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 U.S. Silica Holdings:
P/E of 7.73 = $12.46 ÷ $1.61 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that U.S. Silica Holdings grew EPS by a stonking 94% in the last year. And its annual EPS growth rate over 3 years is 74%. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 11% a year, over 5 years.
How Does U.S. Silica Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that U.S. Silica Holdings has a lower P/E than the average (13) P/E for companies in the energy services industry.
This suggests that market participants think U.S. Silica Holdings will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
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. 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 taking on debt (or spending its remaining cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting U.S. Silica Holdings’s P/E?
Net debt totals a substantial 101% of U.S. Silica Holdings’s market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On U.S. Silica Holdings’s P/E Ratio
U.S. Silica Holdings trades on a P/E ratio of 7.7, which is below the US market average of 16.8. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 U.S. Silica Holdings. 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 email@example.com.