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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Vishay Precision Group, Inc.’s (NYSE:VPG) P/E ratio to inform your assessment of the investment opportunity. Vishay Precision Group has a price to earnings ratio of 18.16, based on the last twelve months. That means that at current prices, buyers pay $18.16 for every $1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Vishay Precision Group:
P/E of 18.16 = $33.49 ÷ $1.84 (Based on the trailing twelve months to September 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Vishay Precision Group increased earnings per share by a whopping 90% last year. And it has bolstered its earnings per share by 29% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Vishay Precision Group’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Vishay Precision Group has a lower P/E than the average (19.8) P/E for companies in the electronic industry.
Its relatively low P/E ratio indicates that Vishay Precision Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Vishay Precision Group, 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
Don’t forget that the P/E ratio considers market capitalization. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Vishay Precision Group’s P/E?
The extra options and safety that comes with Vishay Precision Group’s US$51m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Vishay Precision Group’s P/E Ratio
Vishay Precision Group trades on a P/E ratio of 18.2, which is fairly close to the US market average of 17. Considering its recent growth, alongside its lack of debt, it would appear that the market isn’t very excited about the future. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can take a closer look at the fundamentals, here.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than Vishay Precision Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 email@example.com.