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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Stolt-Nielsen Limited's (OB:SNI) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Stolt-Nielsen has a P/E ratio of 38.58. That is equivalent to an earnings yield of about 2.6%.
Check out our latest analysis for Stolt-Nielsen
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Stolt-Nielsen:
P/E of 38.58 = $11.44 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.30 (Based on the trailing twelve months to May 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does Stolt-Nielsen's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Stolt-Nielsen has a significantly higher P/E than the average (9.7) P/E for companies in the shipping industry.
Stolt-Nielsen's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Stolt-Nielsen shrunk earnings per share by 73% over the last year. And over the longer term (5 years) earnings per share have decreased 30% annually. This growth rate might warrant a below average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Stolt-Nielsen's Debt Impact Its P/E Ratio?
Net debt totals a substantial 332% of Stolt-Nielsen's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.