This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Kewaunee Scientific Corporation’s (NASDAQ:KEQU) P/E ratio to inform your assessment of the investment opportunity. Kewaunee Scientific has a price to earnings ratio of 14.42, based on the last twelve months. In other words, at today’s prices, investors are paying $14.42 for every $1 in prior year profit.
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 Kewaunee Scientific:
P/E of 14.42 = $28.82 ÷ $2 (Based on the trailing twelve months to July 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company 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. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Most would be impressed by Kewaunee Scientific earnings growth of 24% in the last year. And its annual EPS growth rate over 5 years is 5.6%. With that performance, you might expect an above average P/E ratio.
How Does Kewaunee Scientific’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Kewaunee Scientific has a lower P/E than the average (47.8) P/E for companies in the medical equipment industry.
Its relatively low P/E ratio indicates that Kewaunee Scientific shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Kewaunee Scientific, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Kewaunee Scientific’s Debt Impact Its P/E Ratio?
Kewaunee Scientific’s net debt is 0.8% of its 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 Bottom Line On Kewaunee Scientific’s P/E Ratio
Kewaunee Scientific trades on a P/E ratio of 14.4, which is below the US market average of 18.5. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
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. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Kewaunee Scientific. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.