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Is Schneider National, Inc.'s (NYSE:SNDR) P/E Ratio Really That Good?

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Schneider National, Inc.'s (NYSE:SNDR) P/E ratio could help you assess the value on offer. What is Schneider National's P/E ratio? Well, based on the last twelve months it is 17.42. That means that at current prices, buyers pay $17.42 for every $1 in trailing yearly profits.

Check out our latest analysis for Schneider National

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Schneider National:

P/E of 17.42 = $22.33 ÷ $1.28 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Does Schneider National's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (17.5) for companies in the transportation industry is roughly the same as Schneider National's P/E.

NYSE:SNDR Price Estimation Relative to Market, September 17th 2019

That indicates that the market expects Schneider National will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Schneider National's earnings per share fell by 48% in the last twelve months. And it has shrunk its earnings per share by 41% per year over the last five years. This might lead to muted expectations.

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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Is Debt Impacting Schneider National's P/E?

Since Schneider National holds net cash of US$23m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Schneider National's P/E Ratio

Schneider National trades on a P/E ratio of 17.4, which is fairly close to the US market average of 18.2. While the lack of recent growth is probably muting optimism, the healthy balance sheet means the company retains potential for future growth. So it's not surprising to see it trade on a P/E roughly in line with the market.

Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Schneider National. 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.