This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Skechers U.S.A., Inc.'s (NYSE:SKX), to help you decide if the stock is worth further research. What is Skechers U.S.A's P/E ratio? Well, based on the last twelve months it is 19.56. In other words, at today's prices, investors are paying $19.56 for every $1 in prior year profit.
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 Skechers U.S.A:
P/E of 19.56 = $42.57 ÷ $2.18 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Skechers U.S.A 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. You can see in the image below that the average P/E (18.5) for companies in the luxury industry is roughly the same as Skechers U.S.A's P/E.
Its P/E ratio suggests that Skechers U.S.A shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Skechers U.S.A actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Skechers U.S.A grew EPS like Taylor Swift grew her fan base back in 2010; the 82% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 20% is also impressive. So I'd be surprised if the P/E ratio was not above average.
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. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Skechers U.S.A's Debt Impact Its P/E Ratio?
Skechers U.S.A has net cash of US$808m. This is fairly high at 12% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Skechers U.S.A's P/E Ratio
Skechers U.S.A has a P/E of 19.6. That's around the same as the average in the US market, which is 18.7. Its net cash position is the cherry on top of its superb EPS growth. So at a glance we're a bit surprised that Skechers U.S.A does not have a higher P/E ratio. All the more so, since analysts expect further profit growth. Click here to research this potential opportunity..
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
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 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.
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.