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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Amkor Technology, Inc.’s (NASDAQ:AMKR) P/E ratio and reflect on what it tells us about the company’s share price. Amkor Technology has a P/E ratio of 18.03, based on the last twelve months. That is equivalent to an earnings yield of about 5.5%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Amkor Technology:
P/E of 18.03 = $7.13 ÷ $0.40 (Based on the year to March 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 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
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Amkor Technology shrunk earnings per share by 67% over the last year. But it has grown its earnings per share by 58% per year over the last three years. And it has shrunk its earnings per share by 7.1% per year over the last five years. This might lead to muted expectations.
Does Amkor Technology Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Amkor Technology has a lower P/E than the average (21.5) in the semiconductor industry classification.
Amkor Technology’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Amkor Technology’s Debt Impact Its P/E Ratio?
Amkor Technology’s net debt equates to 50% of its market capitalization. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Amkor Technology’s P/E Ratio
Amkor Technology has a P/E of 18. That’s around the same as the average in the US market, which is 17.8. When you consider the lack of EPS growth last year (along with some debt), it seems the market is optimistic about the future for the business.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ 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 Amkor Technology. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 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.