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What Does Valmont Industries, Inc.'s (NYSE:VMI) P/E Ratio Tell You?

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). We'll show how you can use Valmont Industries, Inc.'s (NYSE:VMI) P/E ratio to inform your assessment of the investment opportunity. Valmont Industries has a price to earnings ratio of 13.58, based on the last twelve months. That means that at current prices, buyers pay $13.58 for every $1 in trailing yearly profits.

See our latest analysis for Valmont Industries

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 Valmont Industries:

P/E of 13.58 = $96.430 ÷ $7.100 (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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Valmont Industries Have A Relatively High Or Low P/E For Its Industry?

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 (10.4) for companies in the construction industry is lower than Valmont Industries's P/E.

NYSE:VMI Price Estimation Relative to Market, March 18th 2020
NYSE:VMI Price Estimation Relative to Market, March 18th 2020

That means that the market expects Valmont Industries will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Valmont Industries's earnings made like a rocket, taking off 68% last year. Unfortunately, earnings per share are down 2.6% a year, over 3 years.

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

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does Valmont Industries's Debt Impact Its P/E Ratio?

Valmont Industries's net debt is 21% of its 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 Bottom Line On Valmont Industries's P/E Ratio

Valmont Industries's P/E is 13.6 which is about average (12.8) in the US market. Given it has reasonable debt levels, and grew earnings strongly last year, the P/E indicates the market has doubts this growth can be sustained.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.