This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Cooper-Standard Holdings Inc.'s (NYSE:CPS) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Cooper-Standard Holdings has a P/E ratio of 4.70. That means that at current prices, buyers pay $4.70 for every $1 in trailing yearly profits.
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 Cooper-Standard Holdings:
P/E of 4.70 = $28.40 ÷ $6.04 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Cooper-Standard Holdings's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Cooper-Standard Holdings has a lower P/E than the average (16.7) in the auto components industry classification.
This suggests that market participants think Cooper-Standard Holdings will underperform other companies in its industry. Since the market seems unimpressed with Cooper-Standard Holdings, 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Cooper-Standard Holdings saw earnings per share decrease by 32% last year. But over the longer term (5 years) earnings per share have increased by 20%. And it has shrunk its earnings per share by 6.7% per year over the last three years. This might lead to low expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Cooper-Standard Holdings's P/E?
Cooper-Standard Holdings has net debt worth 96% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Cooper-Standard Holdings's P/E Ratio
Cooper-Standard Holdings's P/E is 4.7 which is below average (18.1) in the US market. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Cooper-Standard Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.