Why Altra Industrial Motion Corp.'s (NASDAQ:AIMC) High P/E Ratio Isn't Necessarily A Bad Thing
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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 Altra Industrial Motion Corp.'s (NASDAQ:AIMC) P/E ratio to inform your assessment of the investment opportunity. Altra Industrial Motion has a price to earnings ratio of 27.12, based on the last twelve months. That means that at current prices, buyers pay $27.12 for every $1 in trailing yearly profits.
View our latest analysis for Altra Industrial Motion
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Altra Industrial Motion:
P/E of 27.12 = $35.78 ÷ $1.32 (Based on the trailing twelve months to March 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 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Altra Industrial Motion saw earnings per share decrease by 24% last year. And EPS is down 2.3% a year, over the last 5 years. This could justify a pessimistic P/E.
Does Altra Industrial Motion 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. You can see in the image below that the average P/E (21.8) for companies in the machinery industry is lower than Altra Industrial Motion's P/E.
That means that the market expects Altra Industrial Motion will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Altra Industrial Motion's Balance Sheet
Altra Industrial Motion's net debt is 68% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Altra Industrial Motion's P/E Ratio
Altra Industrial Motion's P/E is 27.1 which is above average (18.2) in the US market. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Altra Industrial Motion. 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).
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.
