Here's How P/E Ratios Can Help Us Understand Maxim Integrated Products, Inc. (NASDAQ:MXIM)

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Maxim Integrated Products, Inc.'s (NASDAQ:MXIM) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Maxim Integrated Products has a P/E ratio of 21.80. That corresponds to an earnings yield of approximately 4.6%.

See our latest analysis for Maxim Integrated Products

How Do You Calculate Maxim Integrated Products's P/E Ratio?

The formula for price to earnings is:

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

Or for Maxim Integrated Products:

P/E of 21.80 = $61.45 ÷ $2.82 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Maxim Integrated Products 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. The image below shows that Maxim Integrated Products has a lower P/E than the average (33.8) P/E for companies in the semiconductor industry.

Maxim Integrated Products's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Maxim Integrated Products, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. 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.

Maxim Integrated Products's earnings made like a rocket, taking off 55% last year. The sweetener is that the annual five year growth rate of 18% is also impressive. So I'd be surprised if the P/E ratio was not above average.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 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.

So What Does Maxim Integrated Products's Balance Sheet Tell Us?

Maxim Integrated Products has net cash of US$800m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Maxim Integrated Products's P/E Ratio

Maxim Integrated Products's P/E is 21.8 which is above average (18.7) in its market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Maxim Integrated Products to have a high P/E ratio.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

You might be able to find a better buy than Maxim Integrated Products. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.

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. Thank you for reading.