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Do You Know What Ingersoll-Rand Plc's (NYSE:IR) P/E Ratio Means?

Simply Wall St

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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 show how you can use Ingersoll-Rand Plc's (NYSE:IR) P/E ratio to inform your assessment of the investment opportunity. Ingersoll-Rand has a price to earnings ratio of 19.63, based on the last twelve months. That corresponds to an earnings yield of approximately 5.1%.

View our latest analysis for Ingersoll-Rand

How Do I Calculate Ingersoll-Rand's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Ingersoll-Rand:

P/E of 19.63 = $107.95 ÷ $5.5 (Based on the year to December 2018.)

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 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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Ingersoll-Rand's earnings per share grew by -5.5% in the last twelve months. And it has bolstered its earnings per share by 20% per year over the last five years.

How Does Ingersoll-Rand's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below Ingersoll-Rand has a P/E ratio that is fairly close for the average for the machinery industry, which is 20.8.

NYSE:IR Price Estimation Relative to Market, March 31st 2019

Its P/E ratio suggests that Ingersoll-Rand shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. 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.

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).

Is Debt Impacting Ingersoll-Rand's P/E?

Ingersoll-Rand has net debt worth 12% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Verdict On Ingersoll-Rand's P/E Ratio

Ingersoll-Rand has a P/E of 19.6. That's higher than the average in the US market, which is 17.7. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 Ingersoll-Rand. 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 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.