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Here’s What Flex Ltd.’s (NASDAQ:FLEX) P/E Ratio Is Telling Us

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Flex Ltd.’s (NASDAQ:FLEX) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Flex’s P/E ratio is 13.68. That is equivalent to an earnings yield of about 7.3%.

View our latest analysis for Flex

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Flex:

P/E of 13.68 = $7.79 ÷ $0.57 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Flex shrunk earnings per share by 44% over the last year. But EPS is up 3.6% over the last 5 years. And it has shrunk its earnings per share by 3.0% per year over the last three years. This growth rate might warrant a low P/E ratio. This could justify a low P/E.

How Does Flex’s P/E Ratio Compare To Its Peers?

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 Flex has a lower P/E than the average (18.2) in the electronic industry classification.

NasdaqGS:FLEX PE PEG Gauge January 9th 19
NasdaqGS:FLEX PE PEG Gauge January 9th 19

This suggests that market participants think Flex will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. 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 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 Flex’s Debt Impact Its P/E Ratio?

Flex has net debt worth 38% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Flex’s P/E Ratio

Flex has a P/E of 13.7. That’s below the average in the US market, which is 16.7. Since it only carries a modest debt load, it’s likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.

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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Flex. 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 editorial-team@simplywallst.com.

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