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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 apply a basic P/E ratio analysis to Analog Devices, Inc.'s (NASDAQ:ADI), to help you decide if the stock is worth further research. Analog Devices has a P/E ratio of 28.34, based on the last twelve months. That means that at current prices, buyers pay $28.34 for every $1 in trailing yearly profits.
See our latest analysis for Analog Devices
How Do I Calculate Analog Devices's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Analog Devices:
P/E of 28.34 = $113.03 ÷ $3.99 (Based on the year to August 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 $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 Does Analog Devices's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Analog Devices has a P/E ratio that is roughly in line with the semiconductor industry average (27.6).
Its P/E ratio suggests that Analog Devices shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Analog Devices actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Analog Devices's earnings per share grew by -2.4% in the last twelve months. And earnings per share have improved by 12% annually, over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).