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Does Armstrong World Industries, Inc.'s (NYSE:AWI) P/E Ratio Signal A Buying Opportunity?

Simply Wall St
·4 min read

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Armstrong World Industries, Inc.'s (NYSE:AWI) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Armstrong World Industries has a P/E ratio of 22.98. That is equivalent to an earnings yield of about 4.4%.

Check out our latest analysis for Armstrong World Industries

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Armstrong World Industries:

P/E of 22.98 = USD106.45 ÷ USD4.63 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each USD1 of company 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.

Does Armstrong World Industries 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 Armstrong World Industries has a P/E ratio that is roughly in line with the building industry average (23.0).

NYSE:AWI Price Estimation Relative to Market, February 24th 2020
NYSE:AWI Price Estimation Relative to Market, February 24th 2020

Armstrong World Industries's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.

Armstrong World Industries shrunk earnings per share by 5.8% last year. But over the longer term (5 years) earnings per share have increased by 15%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. 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).

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 Armstrong World Industries's Debt Impact Its P/E Ratio?

Net debt totals 11% of Armstrong World Industries's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Verdict On Armstrong World Industries's P/E Ratio

Armstrong World Industries has a P/E of 23.0. That's higher than the average in its market, which is 18.2. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.

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 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.

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.