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What Does Alaska Communications Systems Group, Inc.'s (NASDAQ:ALSK) P/E Ratio Tell You?

Simply Wall St
·4 mins read

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Alaska Communications Systems Group, Inc.'s (NASDAQ:ALSK) P/E ratio could help you assess the value on offer. Alaska Communications Systems Group has a price to earnings ratio of 20.58, based on the last twelve months. That corresponds to an earnings yield of approximately 4.9%.

See our latest analysis for Alaska Communications Systems Group

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 Alaska Communications Systems Group:

P/E of 20.58 = $1.900 ÷ $0.092 (Based on the trailing twelve months to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

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 Alaska Communications Systems Group'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 Alaska Communications Systems Group has a higher P/E than the average (16.4) P/E for companies in the telecom industry.

NasdaqGS:ALSK Price Estimation Relative to Market April 20th 2020
NasdaqGS:ALSK Price Estimation Relative to Market April 20th 2020

Alaska Communications Systems Group'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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Alaska Communications Systems Group shrunk earnings per share by 46% over the last year. But it has grown its earnings per share by 26% per year over the last three years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

Is Debt Impacting Alaska Communications Systems Group's P/E?

Net debt totals a substantial 146% of Alaska Communications Systems Group'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.

The Verdict On Alaska Communications Systems Group's P/E Ratio

Alaska Communications Systems Group has a P/E of 20.6. That's higher than the average in its market, which is 13.6. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

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.

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.

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. Thank you for reading.