This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Schweitzer-Mauduit International Inc’s (NYSE:SWM) P/E ratio to inform your assessment of the investment opportunity. Schweitzer-Mauduit International has a price to earnings ratio of 13.94, based on the last twelve months. That corresponds to an earnings yield of approximately 7.2%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Schweitzer-Mauduit International:
P/E of 13.94 = $27.32 ÷ $1.96 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Schweitzer-Mauduit International shrunk earnings per share by 24% over the last year. And EPS is down 9.1% a year, over the last 5 years. This might lead to muted expectations.
How Does Schweitzer-Mauduit International’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 (8) for companies in the forestry industry is lower than Schweitzer-Mauduit International’s P/E.
That means that the market expects Schweitzer-Mauduit International will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
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.
Is Debt Impacting Schweitzer-Mauduit International’s P/E?
Net debt totals 62% of Schweitzer-Mauduit International’s market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Schweitzer-Mauduit International’s P/E Ratio
Schweitzer-Mauduit International trades on a P/E ratio of 13.9, which is below the US market average of 18. When you consider that the company has significant debt, and didn’t grow EPS last year, it isn’t surprising that the market has muted expectations.
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.
But note: Schweitzer-Mauduit International 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).
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.