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Apple fiscal Q4 earnings preview

Read This Before You Buy Motorola Solutions, Inc. (NYSE:MSI) Because Of Its P/E Ratio

Simply Wall St
·4 mins read

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Motorola Solutions, Inc.'s (NYSE:MSI) P/E ratio and reflect on what it tells us about the company's share price. Motorola Solutions has a P/E ratio of 25.07, based on the last twelve months. That means that at current prices, buyers pay $25.07 for every $1 in trailing yearly profits.

Check out our latest analysis for Motorola Solutions

How Do I Calculate Motorola Solutions's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Motorola Solutions:

P/E of 25.07 = $136.210 ÷ $5.432 (Based on the trailing twelve months to March 2020.)

(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 implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Motorola Solutions Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (34.8) for companies in the communications industry is higher than Motorola Solutions's P/E.

NYSE:MSI Price Estimation Relative to Market May 8th 2020
NYSE:MSI Price Estimation Relative to Market May 8th 2020

Motorola Solutions's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Motorola Solutions, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Motorola Solutions saw earnings per share decrease by 11% last year. But EPS is up 14% over the last 3 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).

So What Does Motorola Solutions's Balance Sheet Tell Us?

Motorola Solutions's net debt is 18% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Motorola Solutions's P/E Ratio

Motorola Solutions trades on a P/E ratio of 25.1, which is above its market average of 14.2. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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. Thank you for reading.