This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at CH 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 P/E ratio of 19.64, based on the last twelve months. That is equivalent to an earnings yield of about 5.1%.
How Do I Calculate C.H. Robinson Worldwide’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for C.H. Robinson Worldwide:
P/E of 19.64 = $88.7 ÷ $4.52 (Based on the year to September 2018.)
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. 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 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. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
C.H. Robinson Worldwide increased earnings per share by a whopping 34% last year. And its annual EPS growth rate over 5 years is 6.8%. With that performance, I would expect it to have an above average P/E ratio.
How Does C.H. Robinson Worldwide’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that C.H. Robinson Worldwide has a higher P/E than the average (17.9) P/E for companies in the logistics industry.
C.H. Robinson Worldwide’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 further research is always essential. I often monitor director buying and 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting C.H. Robinson Worldwide’s P/E?
C.H. Robinson Worldwide has net debt worth just 8.5% of its market capitalization. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Bottom Line On C.H. Robinson Worldwide’s P/E Ratio
C.H. Robinson Worldwide’s P/E is 19.6 which is about average (18.4) in the US market. With only modest debt levels, and strong earnings growth, the market seems to doubt that the growth can be maintained.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course you might be able to find a better stock than C.H. Robinson Worldwide. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.