What Does Autoliv, Inc.'s (NYSE:ALV) P/E Ratio Tell You?

Simply Wall St

Sat, Jun 15, 2019, 8:30 AM

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 Autoliv, Inc.'s (NYSE:ALV), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Autoliv has a P/E ratio of 17.5. That is equivalent to an earnings yield of about 5.7%.

View our latest analysis for Autoliv

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 Autoliv:

P/E of 17.5 = $65.98 ÷ $3.77 (Based on the year to March 2019.)

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. 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

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Autoliv saw earnings per share decrease by 45% last year. And over the longer term (5 years) earnings per share have decreased 6.2% annually. This might lead to muted expectations.

How Does Autoliv's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Autoliv has a higher P/E than the average (14.6) P/E for companies in the auto components industry.

NYSE:ALV Price Estimation Relative to Market, June 15th 2019

That means that the market expects Autoliv will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.