This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Knight-Swift Transportation Holdings Inc.'s (NYSE:KNX) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Knight-Swift Transportation Holdings has a P/E ratio of 17.36. That means that at current prices, buyers pay $17.36 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Knight-Swift Transportation Holdings:
P/E of 17.36 = $31.300 ÷ $1.803 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
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.
Does Knight-Swift Transportation Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below Knight-Swift Transportation Holdings has a P/E ratio that is fairly close for the average for the transportation industry, which is 18.1.
Knight-Swift Transportation Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Knight-Swift Transportation Holdings actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Knight-Swift Transportation Holdings shrunk earnings per share by 24% over the last year. But EPS is up 7.2% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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).
How Does Knight-Swift Transportation Holdings's Debt Impact Its P/E Ratio?
Knight-Swift Transportation Holdings's net debt is 13% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On Knight-Swift Transportation Holdings's P/E Ratio
Knight-Swift Transportation Holdings's P/E is 17.4 which is above average (13.4) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Knight-Swift Transportation 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).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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