The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Apogee Enterprises, Inc.'s (NASDAQ:APOG) P/E ratio and reflect on what it tells us about the company's share price. Apogee Enterprises has a price to earnings ratio of 22.64, based on the last twelve months. In other words, at today's prices, investors are paying $22.64 for every $1 in prior year profit.
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 Apogee Enterprises:
P/E of 22.64 = $37.8 ÷ $1.67 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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 Does Apogee Enterprises's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Apogee Enterprises has a higher P/E than the average (18.5) P/E for companies in the building industry.
That means that the market expects Apogee Enterprises will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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.
Apogee Enterprises saw earnings per share decrease by 40% last year. But over the longer term (5 years) earnings per share have increased by 9.8%. And over the longer term (3 years) earnings per share have decreased 12% annually. This growth rate might warrant a low P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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.
Apogee Enterprises's Balance Sheet
Net debt is 27% of Apogee Enterprises's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Apogee Enterprises's P/E Ratio
Apogee Enterprises has a P/E of 22.6. That's higher than the average in its market, which is 17.3. 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. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Apogee Enterprises 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 email@example.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.