Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Universal Logistics Holdings, Inc.'s (NASDAQ:ULH) P/E ratio could help you assess the value on offer. What is Universal Logistics Holdings's P/E ratio? Well, based on the last twelve months it is 12.13. That is equivalent to an earnings yield of about 8.2%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Universal Logistics Holdings:
P/E of 12.13 = $22.3 ÷ $1.84 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Universal Logistics Holdings's earnings made like a rocket, taking off 86% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 10%.
How Does Universal Logistics Holdings's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (18.5) for companies in the transportation industry is higher than Universal Logistics Holdings's P/E.
Universal Logistics Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.
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.
How Does Universal Logistics Holdings's Debt Impact Its P/E Ratio?
Net debt totals 61% of Universal Logistics Holdings's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Universal Logistics Holdings's P/E Ratio
Universal Logistics Holdings's P/E is 12.1 which is below average (18.2) in the US market. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Universal Logistics Holdings 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).
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