This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use J.B. Hunt Transport Services, Inc.’s (NASDAQ:JBHT) P/E ratio to inform your assessment of the investment opportunity. J.B. Hunt Transport Services has a P/E ratio of 21.58, based on the last twelve months. In other words, at today’s prices, investors are paying $21.58 for every $1 in prior year profit.
How Do You Calculate J.B. Hunt Transport Services’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for J.B. Hunt Transport Services:
P/E of 21.58 = $96.59 ÷ $4.48 (Based on the year to December 2018.)
Is A High P/E 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.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
J.B. Hunt Transport Services saw earnings per share decrease by 28% last year. But EPS is up 17% over the last 5 years.
How Does J.B. Hunt Transport Services’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 (16.9) for companies in the transportation industry is lower than J.B. Hunt Transport Services’s P/E.
That means that the market expects J.B. Hunt Transport Services will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. 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 J.B. Hunt Transport Services’s P/E?
Net debt totals 11% of J.B. Hunt Transport Services’s market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Verdict On J.B. Hunt Transport Services’s P/E Ratio
J.B. Hunt Transport Services’s P/E is 21.6 which is above average (17.2) in the US market. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors should be looking to buy stocks that the market is wrong about. 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 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 firstname.lastname@example.org. 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.