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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Honeywell International Inc.'s (NYSE:HON) P/E ratio and reflect on what it tells us about the company's share price. Honeywell International has a price to earnings ratio of 19.03, based on the last twelve months. That is equivalent to an earnings yield of about 5.3%.
How Do I Calculate Honeywell International's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Honeywell International:
P/E of 19.03 = $173.94 ÷ $9.14 (Based on the year to March 2019.)
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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Honeywell International grew EPS like Taylor Swift grew her fan base back in 2010; the 318% gain was both fast and well deserved. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 13%.
Does Honeywell International Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Honeywell International has a lower P/E than the average (21.7) P/E for companies in the industrials industry.
Its relatively low P/E ratio indicates that Honeywell International shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.
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 Honeywell International's P/E?
Net debt totals just 4.3% of Honeywell International's market cap. 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 Honeywell International's P/E Ratio
Honeywell International has a P/E of 19. That's around the same as the average in the US market, which is 17.8. With only modest debt levels, and strong earnings growth, the market seems to doubt that the growth can be maintained.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 Honeywell International. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.