This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Weight Watchers International Inc’s (NASDAQ:WTW) P/E ratio and reflect on what it tells us about the company’s share price. Weight Watchers International has a price to earnings ratio of 12.77, based on the last twelve months. That corresponds to an earnings yield of approximately 7.8%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Weight Watchers International:
P/E of 12.77 = $47.23 ÷ $3.7 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Weight Watchers International increased earnings per share by a whopping 109% last year. And it has improved its earnings per share by 67% per year over the last three years. I’d therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 4.9%, annually, over 5 years.
How Does Weight Watchers International’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Weight Watchers International has a lower P/E than the average (26.5) P/E for companies in the consumer services industry.
Its relatively low P/E ratio indicates that Weight Watchers International shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Weight Watchers International, 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.
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. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Weight Watchers International’s Balance Sheet
Net debt totals 50% of Weight Watchers International’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On Weight Watchers International’s P/E Ratio
Weight Watchers International trades on a P/E ratio of 12.8, which is below the US market average of 17.9. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified.
Investors should be looking to buy stocks that the market is wrong about. 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.
Of course you might be able to find a better stock than Weight Watchers International. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 email@example.com.