This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Alaska Communications Systems Group, Inc.'s (NASDAQ:ALSK) P/E ratio and reflect on what it tells us about the company's share price. What is Alaska Communications Systems Group's P/E ratio? Well, based on the last twelve months it is 24.73. In other words, at today's prices, investors are paying $24.73 for every $1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Alaska Communications Systems Group:
P/E of 24.73 = $1.76 ÷ $0.07 (Based on the year to June 2019.)
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.
Does Alaska Communications Systems Group 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. As you can see below, Alaska Communications Systems Group has a higher P/E than the average company (16.4) in the telecom industry.
Its relatively high P/E ratio indicates that Alaska Communications Systems Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Alaska Communications Systems Group increased earnings per share by a whopping 28% last year. And its annual EPS growth rate over 3 years is 22%. With that performance, I would expect it to have an above average P/E ratio. But earnings per share are down 51% per year over the last five years.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Alaska Communications Systems Group's Debt Impact Its P/E Ratio?
Alaska Communications Systems Group 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 Bottom Line On Alaska Communications Systems Group's P/E Ratio
Alaska Communications Systems Group has a P/E of 24.7. That's higher than the average in its market, which is 18.2. While the meaningful level of debt does limit its options, it has achieved solid growth over the last year. It seems the market believes growth will continue, judging by the P/E ratio.
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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Alaska Communications Systems Group. 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.