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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to YETI Holdings, Inc.'s (NYSE:YETI), to help you decide if the stock is worth further research. YETI Holdings has a P/E ratio of 31.98, based on the last twelve months. That corresponds to an earnings yield of approximately 3.1%.

See our latest analysis for YETI Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for YETI Holdings:

P/E of 31.98 = $24.5 ÷ $0.77 (Based on the trailing twelve months to March 2019.)

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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

In the last year, YETI Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 416% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 53% per year. With that kind of growth rate we would generally expect a high P/E ratio.

Does YETI Holdings Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that YETI Holdings has a higher P/E than the average (17.4) P/E for companies in the leisure industry.

YETI Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).