This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at United Continental Holdings, Inc.’s (NASDAQ:UAL) P/E ratio and reflect on what it tells us about the company’s share price. United Continental Holdings has a P/E ratio of 10.51, based on the last twelve months. That means that at current prices, buyers pay $10.51 for every $1 in trailing yearly profits.
How Do You Calculate United Continental Holdings’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for United Continental Holdings:
P/E of 10.51 = $81.22 ÷ $7.73 (Based on the year to December 2018.)
Is A High P/E 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
United Continental Holdings saw earnings per share improve by -9.1% last year. And earnings per share have improved by 9.6% annually, over the last five years. In contrast, EPS has decreased by 38%, annually, over 3 years.
How Does United Continental Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that United Continental Holdings has a lower P/E than the average (11.8) P/E for companies in the airlines industry.
This suggests that market participants think United Continental Holdings will underperform other companies in its industry. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
United Continental Holdings’s Balance Sheet
Net debt totals 50% of United Continental Holdings’s market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On United Continental Holdings’s P/E Ratio
United Continental Holdings has a P/E of 10.5. That’s below the average in the US market, which is 17.6. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue – or even increase – then the low P/E may signify opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: United Continental 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).
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.