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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Wabash National Corporation's (NYSE:WNC) P/E ratio and reflect on what it tells us about the company's share price. Wabash National has a P/E ratio of 14.03, based on the last twelve months. That means that at current prices, buyers pay $14.03 for every $1 in trailing yearly profits.
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 Wabash National:
P/E of 14.03 = $15.66 ÷ $1.12 (Based on the year to March 2019.)
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.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Wabash National saw earnings per share decrease by 42% last year. But over the longer term (5 years) earnings per share have increased by 9.9%. And it has shrunk its earnings per share by 15% per year over the last three years. This might lead to low expectations.
Does Wabash National Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Wabash National has a lower P/E than the average (22.6) in the machinery industry classification.
This suggests that market participants think Wabash National will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
How Does Wabash National's Debt Impact Its P/E Ratio?
Wabash National's net debt equates to 41% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Wabash National's P/E Ratio
Wabash National has a P/E of 14. That's below the average in the US market, which is 18.4. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Wabash National 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).
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 firstname.lastname@example.org. 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.