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Is C.H. Robinson Worldwide, Inc.'s (NASDAQ:CHRW) P/E Ratio Really That Good?

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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 C.H. Robinson Worldwide, Inc.'s (NASDAQ:CHRW) P/E ratio and reflect on what it tells us about the company's share price. C.H. Robinson Worldwide has a price to earnings ratio of 17.11, based on the last twelve months. That corresponds to an earnings yield of approximately 5.8%.

Check out our latest analysis for C.H. Robinson Worldwide

How Do You Calculate C.H. Robinson Worldwide's P/E Ratio?

The formula for P/E is:

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

Or for C.H. Robinson Worldwide:

P/E of 17.11 = $84.51 ÷ $4.94 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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.

Does C.H. Robinson Worldwide Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that C.H. Robinson Worldwide has a lower P/E than the average (19.3) P/E for companies in the logistics industry.

NasdaqGS:CHRW Price Estimation Relative to Market, July 16th 2019

This suggests that market participants think C.H. Robinson Worldwide will underperform other companies in its industry. Since the market seems unimpressed with C.H. Robinson Worldwide, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It's nice to see that C.H. Robinson Worldwide grew EPS by a stonking 32% in the last year. And it has bolstered its earnings per share by 13% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 C.H. Robinson Worldwide's Debt Impact Its P/E Ratio?

Net debt totals just 7.8% of C.H. Robinson Worldwide's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On C.H. Robinson Worldwide's P/E Ratio

C.H. Robinson Worldwide has a P/E of 17.1. That's around the same as the average in the US market, which is 18. When you consider the impressive EPS growth last year (along with some debt), it seems the market has questions about whether rapid EPS growth will be sustained.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.