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Should We Worry About AMERCO's (NASDAQ:UHAL) P/E Ratio?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to AMERCO's (NASDAQ:UHAL), to help you decide if the stock is worth further research. AMERCO has a price to earnings ratio of 19.63, based on the last twelve months. In other words, at today's prices, investors are paying $19.63 for every $1 in prior year profit.

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How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for AMERCO:

P/E of 19.63 = $381.6 ÷ $19.44 (Based on the year to December 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. 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.'

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

AMERCO's earnings per share fell by 52% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 2.2%. And over the longer term (3 years) earnings per share have decreased 5.1% annually. This might lead to low expectations.

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

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, AMERCO has a higher P/E than the average company (17.4) in the transportation industry.

NasdaqGS:UHAL Price Estimation Relative to Market, May 21st 2019

That means that the market expects AMERCO 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.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Is Debt Impacting AMERCO's P/E?

AMERCO has net debt equal to 40% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On AMERCO's P/E Ratio

AMERCO trades on a P/E ratio of 19.6, which is above the US market average of 17.7. With some debt but no EPS growth last year, the market has high expectations of future profits.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

But note: AMERCO may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.