Does Skechers U.S.A., Inc. (NYSE:SKX) Have A Good P/E Ratio?
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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Skechers U.S.A., Inc.'s (NYSE:SKX), to help you decide if the stock is worth further research. What is Skechers U.S.A's P/E ratio? Well, based on the last twelve months it is 17.09. That is equivalent to an earnings yield of about 5.9%.
See our latest analysis for Skechers U.S.A
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Skechers U.S.A:
P/E of 17.09 = $32.19 ÷ $1.88 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. 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.
Skechers U.S.A increased earnings per share by a whopping 45% last year. And earnings per share have improved by 29% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
How Does Skechers U.S.A's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (17.1) for companies in the luxury industry is roughly the same as Skechers U.S.A's P/E.
Skechers U.S.A's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 Skechers U.S.A's P/E?
With net cash of US$674m, Skechers U.S.A has a very strong balance sheet, which may be important for its business. Having said that, at 13% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Skechers U.S.A's P/E Ratio
Skechers U.S.A has a P/E of 17.1. That's around the same as the average in the US market, which is 18.2. The excess cash it carries is the gravy on top its fast EPS growth. So at a glance we're a bit surprised that Skechers U.S.A does not have a higher P/E ratio. All the more so, since analysts expect further profit growth. Click here to research this potential opportunity..
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Skechers U.S.A. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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. Thank you for reading.
