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Don't Sell Applied Industrial Technologies, Inc. (NYSE:AIT) Before You Read This

Simply Wall St

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Applied Industrial Technologies, Inc.'s (NYSE:AIT) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Applied Industrial Technologies's P/E ratio is 19.19. That is equivalent to an earnings yield of about 5.2%.

View our latest analysis for Applied Industrial Technologies

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Applied Industrial Technologies:

P/E of 19.19 = USD66.48 ÷ USD3.46 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each USD1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Applied Industrial Technologies Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Applied Industrial Technologies has a higher P/E than the average company (17.6) in the trade distributors industry.

NYSE:AIT Price Estimation Relative to Market, January 22nd 2020
NYSE:AIT Price Estimation Relative to Market, January 22nd 2020

That means that the market expects Applied Industrial Technologies will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Applied Industrial Technologies's earnings per share fell by 15% in the last twelve months. But EPS is up 4.7% over the last 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

How Does Applied Industrial Technologies's Debt Impact Its P/E Ratio?

Applied Industrial Technologies's net debt equates to 33% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Applied Industrial Technologies's P/E Ratio

Applied Industrial Technologies's P/E is 19.2 which is about average (18.9) in the US market. When you consider the lack of EPS growth last year (along with some debt), it seems the market is optimistic about the future for the business.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Applied Industrial Technologies 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).

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.