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 Kennedy-Wilson Holdings, Inc.’s (NYSE:KW) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Kennedy-Wilson Holdings’s P/E ratio is 20.48. That is equivalent to an earnings yield of about 4.9%.
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 Kennedy-Wilson Holdings:
P/E of 20.48 = $21.37 ÷ $1.04 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. 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.
Notably, Kennedy-Wilson Holdings grew EPS by a whopping 25% in the last year. And it has bolstered its earnings per share by 49% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Kennedy-Wilson Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Kennedy-Wilson Holdings has a higher P/E than the average (15.5) P/E for companies in the real estate industry.
Kennedy-Wilson Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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 Kennedy-Wilson Holdings’s P/E?
Kennedy-Wilson Holdings has net debt worth a very significant 161% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Kennedy-Wilson Holdings’s P/E Ratio
Kennedy-Wilson Holdings has a P/E of 20.5. That’s higher than the average in the US market, which is 17.6. While the meaningful level of debt does limit its options, it has achieved solid growth over the last year. But if growth falters, the relatively high P/E ratio may prove to be unjustified.
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 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 Kennedy-Wilson Holdings. 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).
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If you spot an error that warrants correction, please contact the editor at email@example.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.