In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Kimberly-Clark Corporation's (NYSE:KMB), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Kimberly-Clark has a P/E ratio of 25.89. In other words, at today's prices, investors are paying $25.89 for every $1 in prior year profit.
Check out our latest analysis for Kimberly-Clark
How Do I Calculate Kimberly-Clark's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Kimberly-Clark:
P/E of 25.89 = $135.04 ÷ $5.21 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings 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 Does Kimberly-Clark's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (26.7) for companies in the household products industry is roughly the same as Kimberly-Clark's P/E.
That indicates that the market expects Kimberly-Clark will perform roughly in line with other companies in its industry. So if Kimberly-Clark actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Kimberly-Clark increased earnings per share by 5.6% last year. And its annual EPS growth rate over 5 years is 1.2%. Unfortunately, earnings per share are down 1.3% a year, over 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).