This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how C.H. Robinson Worldwide, Inc.’s (NASDAQ:CHRW) P/E ratio could help you assess the value on offer. C.H. Robinson Worldwide has a P/E ratio of 18.96, based on the last twelve months. That corresponds to an earnings yield of approximately 5.3%.
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How Do You Calculate C.H. Robinson Worldwide’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for C.H. Robinson Worldwide:
P/E of 18.96 = $85.63 ÷ $4.52 (Based on the year 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, C.H. Robinson Worldwide grew EPS by a whopping 34% in the last year. And its annual EPS growth rate over 5 years is 6.8%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does C.H. Robinson Worldwide’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16.4) for companies in the logistics industry is lower than C.H. Robinson Worldwide’s P/E.
That means that the market expects C.H. Robinson Worldwide will outperform other companies in its industry. 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 C.H. Robinson Worldwide’s P/E?
C.H. Robinson Worldwide’s net debt is 9.2% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Verdict On C.H. Robinson Worldwide’s P/E Ratio
C.H. Robinson Worldwide’s P/E is 19 which is above average (16.8) in the US market. Its debt levels do not imperil its balance sheet and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company
Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold they 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.
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.