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Does Herman Miller, Inc. (NASDAQ:MLHR) Have A Good P/E Ratio?

Simply Wall St
·4 mins read

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Herman Miller, Inc.'s (NASDAQ:MLHR) P/E ratio could help you assess the value on offer. Herman Miller has a price to earnings ratio of 11.21, based on the last twelve months. That corresponds to an earnings yield of approximately 8.9%.

Check out our latest analysis for Herman Miller

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Herman Miller:

P/E of 11.21 = USD40.40 ÷ USD3.60 (Based on the year to November 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Herman Miller's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Herman Miller has a lower P/E than the average (26.2) in the commercial services industry classification.

NasdaqGS:MLHR Price Estimation Relative to Market, February 5th 2020
NasdaqGS:MLHR Price Estimation Relative to Market, February 5th 2020

This suggests that market participants think Herman Miller will underperform other companies in its industry. Since the market seems unimpressed with Herman Miller, 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

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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Herman Miller's earnings made like a rocket, taking off 57% last year. The cherry on top is that the five year growth rate was an impressive 19% per year. So I'd be surprised if the P/E ratio was not above average.

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

Don't forget that the P/E ratio considers market capitalization. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Herman Miller's P/E?

Net debt totals just 4.2% of Herman Miller's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Herman Miller's P/E Ratio

Herman Miller's P/E is 11.2 which is below average (18.2) in the US market. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.

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.