Don’t Sell Cleanaway Waste Management Limited (ASX:CWY) Before You Read This

Bernadette Hatcher

Sun, Feb 17, 2019, 7:58 PM

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 Cleanaway Waste Management Limited’s (ASX:CWY) P/E ratio to inform your assessment of the investment opportunity. Cleanaway Waste Management has a P/E ratio of 36.65, based on the last twelve months. That means that at current prices, buyers pay A$36.65 for every A$1 in trailing yearly profits.

See our latest analysis for Cleanaway Waste Management

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Cleanaway Waste Management:

P/E of 36.65 = A$2.15 ÷ A$0.059 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each A$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

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. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Cleanaway Waste Management saw earnings per share improve by -8.3% last year. And its annual EPS growth rate over 5 years is 70%.

How Does Cleanaway Waste Management’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Cleanaway Waste Management has a higher P/E than the average (22.3) P/E for companies in the commercial services industry.

That means that the market expects Cleanaway Waste Management will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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. 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 taking on debt (or spending its remaining cash).