Despite Its High P/E Ratio, Is Rogers Corporation (NYSE:ROG) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Rogers Corporation’s (NYSE:ROG), to help you decide if the stock is worth further research. Based on the last twelve months, Rogers’s P/E ratio is 24.65. That is equivalent to an earnings yield of about 4.1%.

View our latest analysis for Rogers

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Rogers:

P/E of 24.65 = USD133.75 ÷ USD5.43 (Based on the trailing twelve months to September 2019.)

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 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.

Does Rogers Have A Relatively High Or Low P/E For Its Industry?

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, Rogers has a higher P/E than the average company (21.5) in the electronic industry.

NYSE:ROG Price Estimation Relative to Market, January 21st 2020
NYSE:ROG Price Estimation Relative to Market, January 21st 2020

Rogers’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Notably, Rogers grew EPS by a whopping 42% in the last year. And its annual EPS growth rate over 5 years is 11%. So we’d generally expect it to have a relatively high P/E ratio.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. 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.

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Rogers’s Balance Sheet Tell Us?

The extra options and safety that comes with Rogers’s US$8.7m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Rogers’s P/E Ratio

Rogers trades on a P/E ratio of 24.7, which is above its market average of 19.0. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect Rogers to have a high P/E ratio.

Investors have an opportunity when market expectations about a stock are wrong. 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 Rogers. 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.