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# Should You Be Tempted To Sell Kaman Corporation (NYSE:KAMN) Because Of Its P/E Ratio?

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Kaman Corporation's (NYSE:KAMN) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Kaman has a P/E ratio of 30.11. That is equivalent to an earnings yield of about 3.3%.

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### How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share Ã· Earnings per Share (EPS)

Or for Kaman:

P/E of 30.11 = \$58.4 Ã· \$1.94 (Based on the trailing twelve months to March 2019.)

### Is A High P/E 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

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Kaman shrunk earnings per share by 6.3% last year. And over the longer term (5 years) earnings per share have decreased 4.0% annually. So we might expect a relatively low P/E.

### Does Kaman Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Kaman has a higher P/E than the average company (15.8) in the trade distributors industry.

That means that the market expects Kaman will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

### A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

### Kaman's Balance Sheet

Kaman has net debt worth 22% of its market capitalization. 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 Bottom Line On Kaman's P/E Ratio

Kaman has a P/E of 30.1. That's higher than the average in the US market, which is 17.7. 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. 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.

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