This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Tyson Foods, Inc.'s (NYSE:TSN) P/E ratio to inform your assessment of the investment opportunity. Tyson Foods has a price to earnings ratio of 16.31, based on the last twelve months. That means that at current prices, buyers pay $16.31 for every $1 in trailing yearly profits.
How Do You Calculate Tyson Foods's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Tyson Foods:
P/E of 16.31 = $90.86 ÷ $5.57 (Based on the year to September 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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
Does Tyson Foods Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Tyson Foods has a lower P/E than the average (24.5) in the food industry classification.
Its relatively low P/E ratio indicates that Tyson Foods shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or 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. 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.
Tyson Foods saw earnings per share decrease by 33% last year. But over the longer term (5 years) earnings per share have increased by 18%.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
So What Does Tyson Foods's Balance Sheet Tell Us?
Net debt is 34% of Tyson Foods's market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Tyson Foods's P/E Ratio
Tyson Foods's P/E is 16.3 which is below average (18.9) in the US market. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Tyson Foods. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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