This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Artesian Resources Corporation's (NASDAQ:ARTN.A) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Artesian Resources's P/E ratio is 24.62. That means that at current prices, buyers pay $24.62 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 = Price per Share ÷ Earnings per Share (EPS)
Or for Artesian Resources:
P/E of 24.62 = USD39.25 ÷ USD1.59 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each USD1 of company earnings. 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 Artesian Resources Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Artesian Resources has a lower P/E than the average (38.5) P/E for companies in the water utilities industry.
This suggests that market participants think Artesian Resources will underperform other companies in its industry. Since the market seems unimpressed with Artesian Resources, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Artesian Resources shrunk earnings per share by 2.2% last year. But EPS is up 9.7% over the last 5 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
Artesian Resources's Balance Sheet
Net debt is 41% of Artesian Resources's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Artesian Resources's P/E Ratio
Artesian Resources trades on a P/E ratio of 24.6, which is above its market average of 18.6. 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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
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.
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