The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Norwegian Cruise Line Holdings Ltd.'s (NYSE:NCLH) P/E ratio and reflect on what it tells us about the company's share price. What is Norwegian Cruise Line Holdings's P/E ratio? Well, based on the last twelve months it is 12.42. That corresponds to an earnings yield of approximately 8.1%.
How Do You Calculate Norwegian Cruise Line Holdings's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Norwegian Cruise Line Holdings:
P/E of 12.42 = $55.22 ÷ $4.45 (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.
Does Norwegian Cruise Line Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Norwegian Cruise Line Holdings has a lower P/E than the average (23.3) in the hospitality industry classification.
This suggests that market participants think Norwegian Cruise Line Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Norwegian Cruise Line Holdings increased earnings per share by an impressive 11% over the last twelve months. And its annual EPS growth rate over 5 years is 18%. With that performance, you might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Norwegian Cruise Line Holdings's Balance Sheet
Net debt is 50% of Norwegian Cruise Line Holdings's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Norwegian Cruise Line Holdings's P/E Ratio
Norwegian Cruise Line Holdings trades on a P/E ratio of 12.4, which is below the US market average of 18.7. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can take a closer look at the fundamentals, here.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Norwegian Cruise Line 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.
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