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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at The J. M. Smucker Company’s (NYSE:SJM) P/E ratio and reflect on what it tells us about the company’s share price. What is J. M. Smucker’s P/E ratio? Well, based on the last twelve months it is 22.96. That is equivalent to an earnings yield of about 4.4%.
How Do I Calculate J. M. Smucker’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for J. M. Smucker:
P/E of 22.96 = $126.9 ÷ $5.53 (Based on the trailing twelve months to January 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
J. M. Smucker saw earnings per share decrease by 50% last year. But EPS is up 17% over the last 3 years.
How Does J. M. Smucker’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (23.4) for companies in the food industry is roughly the same as J. M. Smucker’s P/E.
Its P/E ratio suggests that J. M. Smucker shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
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. So it won’t reflect the advantage of cash, or disadvantage of debt. 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.
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.
So What Does J. M. Smucker’s Balance Sheet Tell Us?
J. M. Smucker has net debt equal to 41% of its market cap. While it’s worth keeping this in mind, it isn’t a worry.
The Verdict On J. M. Smucker’s P/E Ratio
J. M. Smucker has a P/E of 23. That’s higher than the average in the US market, which is 18.1. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.
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. 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 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.