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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Eddie Stobart Logistics plc's (LON:ESL) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Eddie Stobart Logistics has a P/E ratio of 16.94. That is equivalent to an earnings yield of about 5.9%.
View our latest analysis for Eddie Stobart Logistics
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Eddie Stobart Logistics:
P/E of 16.94 = £0.75 ÷ £0.044 (Based on the trailing twelve months to November 2018.)
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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Eddie Stobart Logistics grew EPS like Taylor Swift grew her fan base back in 2010; the 265% gain was both fast and well deserved. And earnings per share have improved by 40% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Does Eddie Stobart Logistics Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Eddie Stobart Logistics has a higher P/E than the average (9.1) P/E for companies in the transportation industry.
Its relatively high P/E ratio indicates that Eddie Stobart Logistics shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.