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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 Expeditors International of Washington, Inc.’s (NASDAQ:EXPD) P/E ratio and reflect on what it tells us about the company’s share price. Expeditors International of Washington has a P/E ratio of 20.58, based on the last twelve months. That means that at current prices, buyers pay $20.58 for every $1 in trailing yearly profits.
How Do I Calculate Expeditors International of Washington’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Expeditors International of Washington:
P/E of 20.58 = $71.12 ÷ $3.46 (Based on the year to September 2018.)
Is A High P/E 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Expeditors International of Washington increased earnings per share by a whopping 44% last year. And earnings per share have improved by 12% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
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. You can see in the image below that the average P/E (19.2) for companies in the logistics industry is roughly the same as Expeditors International of Washington’s P/E.
That indicates that the market expects Expeditors International of Washington will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Is Debt Impacting Expeditors International of Washington’s P/E?
Expeditors International of Washington has net cash of US$991m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Expeditors International of Washington’s P/E Ratio
Expeditors International of Washington trades on a P/E ratio of 20.6, which is above the US market average of 16.8. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 Expeditors International of Washington. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.