Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
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 American Outdoor Brands Corporation's (NASDAQ:AOBC) P/E ratio to inform your assessment of the investment opportunity. American Outdoor Brands has a price to earnings ratio of 32.12, based on the last twelve months. That means that at current prices, buyers pay $32.12 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for American Outdoor Brands:
P/E of 32.12 = $9.6 ÷ $0.30 (Based on the trailing twelve months to January 2019.)
Is A High P/E 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
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
American Outdoor Brands shrunk earnings per share by 60% over the last year. And it has shrunk its earnings per share by 9.5% per year over the last five years. This growth rate might warrant a below average P/E ratio.
How Does American Outdoor Brands's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that American Outdoor Brands has a higher P/E than the average (16.4) P/E for companies in the leisure industry.
American Outdoor Brands's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
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. That means it doesn't take debt or cash into account. 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 American Outdoor Brands's P/E?
American Outdoor Brands's net debt is 36% of its market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On American Outdoor Brands's P/E Ratio
American Outdoor Brands has a P/E of 32.1. That's higher than the average in the US market, which is 17.9. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
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.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.