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 CCL Industries Inc.'s (TSE:CCL.B), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, CCL Industries has a P/E ratio of 20.85. That means that at current prices, buyers pay CA$20.85 for every CA$1 in trailing yearly profits.
How Do You Calculate CCL Industries's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for CCL Industries:
P/E of 20.85 = CAD57.14 ÷ CAD2.74 (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 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 Does CCL Industries's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below CCL Industries has a P/E ratio that is fairly close for the average for the packaging industry, which is 19.6.
CCL Industries's P/E tells us that market participants think its prospects are roughly in line with its industry. So if CCL Industries actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
CCL Industries saw earnings per share decrease by 7.3% last year. But over the longer term (5 years) earnings per share have increased by 20%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.
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.
So What Does CCL Industries's Balance Sheet Tell Us?
CCL Industries's net debt is 18% of its market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Verdict On CCL Industries's P/E Ratio
CCL Industries trades on a P/E ratio of 20.9, which is above its market average of 15.8. 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 should be looking to buy stocks that the market is wrong about. 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.
But note: CCL Industries 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 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.
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