In This Article:
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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 Amcor plc's (ASX:AMC) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Amcor's P/E ratio is 13.16. That corresponds to an earnings yield of approximately 7.6%.
See our latest analysis for Amcor
How Do You Calculate Amcor's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Amcor:
P/E of 13.16 = $11.39 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.87 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each A$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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Amcor's earnings made like a rocket, taking off 59% last year. Even better, EPS is up 31% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Does Amcor 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. As you can see below Amcor has a P/E ratio that is fairly close for the average for the packaging industry, which is 13.5.
Amcor's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Amcor actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).