This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how New England Realty Associates Limited Partnership’s (NYSEMKT:NEN) P/E ratio could help you assess the value on offer. New England Realty Associates Limited Partnership has a P/E ratio of 49.97, based on the last twelve months. In other words, at today’s prices, investors are paying $49.97 for every $1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for New England Realty Associates Limited Partnership:
P/E of 49.97 = $57.32 ÷ $1.15 (Based on the year 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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
New England Realty Associates Limited Partnership shrunk earnings per share by 37% over the last year. But EPS is up 31% over the last 5 years.
How Does New England Realty Associates Limited Partnership’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that New England Realty Associates Limited Partnership has a significantly higher P/E than the average (14.9) P/E for companies in the real estate industry.
New England Realty Associates Limited Partnership’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
How Does New England Realty Associates Limited Partnership’s Debt Impact Its P/E Ratio?
New England Realty Associates Limited Partnership has net debt worth a very significant 116% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On New England Realty Associates Limited Partnership’s P/E Ratio
New England Realty Associates Limited Partnership trades on a P/E ratio of 50, which is above the US market average of 17. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.
Investors should be looking to buy stocks that the market is wrong about. 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.’ We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than New England Realty Associates Limited Partnership. 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.