This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Schweitzer-Mauduit International Inc’s (NYSE:SWM) P/E ratio to inform your assessment of the investment opportunity. Schweitzer-Mauduit International has a price to earnings ratio of 13.94, based on the last twelve months. That corresponds to an earnings yield of approximately 7.2%.
Check out our latest analysis for Schweitzer-Mauduit International
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Schweitzer-Mauduit International:
P/E of 13.94 = $27.32 ÷ $1.96 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Schweitzer-Mauduit International shrunk earnings per share by 24% over the last year. And EPS is down 9.1% a year, over the last 5 years. This might lead to muted expectations.
How Does Schweitzer-Mauduit International’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (8) for companies in the forestry industry is lower than Schweitzer-Mauduit International’s P/E.
That means that the market expects Schweitzer-Mauduit International 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.
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.