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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Turning Point Brands, Inc.'s (NYSE:TPB) P/E ratio and reflect on what it tells us about the company's share price. What is Turning Point Brands's P/E ratio? Well, based on the last twelve months it is 33.04. That corresponds to an earnings yield of approximately 3.0%.
Check out our latest analysis for Turning Point Brands
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Turning Point Brands:
P/E of 33.04 = $48.98 ÷ $1.48 (Based on the trailing twelve months to March 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Turning Point Brands increased earnings per share by a whopping 33% last year. And earnings per share have improved by 10% annually, over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Does Turning Point Brands Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Turning Point Brands has a higher P/E than the average (13) P/E for companies in the tobacco industry.
Turning Point Brands's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.