This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Expeditors International of Washington, Inc.’s (NASDAQ:EXPD) P/E ratio could help you assess the value on offer. Expeditors International of Washington has a P/E ratio of 20.68, based on the last twelve months. That corresponds to an earnings yield of approximately 4.8%.
View our latest analysis for Expeditors International of Washington
How Do You Calculate Expeditors International of Washington’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Expeditors International of Washington:
P/E of 20.68 = $76.22 ÷ $3.69 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Expeditors International of Washington’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (23.2) for companies in the logistics industry is higher than Expeditors International of Washington’s P/E.
Its relatively low P/E ratio indicates that Expeditors International of Washington shareholders think it will struggle to do as well as other companies in its industry classification.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Expeditors International of Washington increased earnings per share by an impressive 16% over the last twelve months. And its annual EPS growth rate over 5 years is 16%. This could arguably justify a relatively high P/E ratio.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
Is Debt Impacting Expeditors International of Washington’s P/E?
Since Expeditors International of Washington holds net cash of US$1.1b, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Expeditors International of Washington’s P/E Ratio
Expeditors International of Washington has a P/E of 20.7. That’s higher than the average in its market, which is 18.3. With cash in the bank the company has plenty of growth options — and it is already on the right track. So it does not seem strange that the P/E is above average.
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 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.
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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. Thank you for reading.