Here's What Tiffany & Co.'s (NYSE:TIF) P/E Is Telling Us
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Tiffany & Co.'s (NYSE:TIF) P/E ratio and reflect on what it tells us about the company's share price. What is Tiffany's P/E ratio? Well, based on the last twelve months it is 19.73. That means that at current prices, buyers pay $19.73 for every $1 in trailing yearly profits.
See our latest analysis for Tiffany
How Do You Calculate Tiffany's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Tiffany:
P/E of 19.73 = $91.94 ÷ $4.66 (Based on the year to April 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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Tiffany grew EPS by a whopping 38% in the last year. And it has bolstered its earnings per share by 22% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.
How Does Tiffany's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (14.6) for companies in the specialty retail industry is lower than Tiffany's P/E.
Tiffany's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
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. 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.
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.
Is Debt Impacting Tiffany's P/E?
Tiffany has net debt worth just 2.3% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Verdict On Tiffany's P/E Ratio
Tiffany trades on a P/E ratio of 19.7, which is above the US market average of 17.8. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 be able to find a better stock than Tiffany. So you may wish to see this free collection of other companies that have grown earnings strongly.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.