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Is CSW Industrials, Inc.’s (NASDAQ:CSWI) High P/E Ratio A Problem For Investors?

Andrew Edmonds

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at CSW Industrials, Inc.’s (NASDAQ:CSWI) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, CSW Industrials’s P/E ratio is 20.32. That corresponds to an earnings yield of approximately 4.9%.

View our latest analysis for CSW Industrials

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for CSW Industrials:

P/E of 20.32 = $56.16 ÷ $2.76 (Based on the year to December 2018.)

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 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. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

CSW Industrials increased earnings per share by a whopping 71% last year. And earnings per share have improved by 8.2% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

How Does CSW Industrials’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (17.5) for companies in the building industry is lower than CSW Industrials’s P/E.

NASDAQGS:CSWI PE PEG Gauge February 19th 19
NASDAQGS:CSWI PE PEG Gauge February 19th 19

CSW Industrials’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.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

CSW Industrials’s Balance Sheet

CSW Industrials has net cash of US$2.8m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On CSW Industrials’s P/E Ratio

CSW Industrials has a P/E of 20.3. That’s higher than the average in the US market, which is 17.2. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: CSW Industrials may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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. On rare occasion, data errors may occur. Thank you for reading.