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Should We Worry About Ulta Beauty, Inc.’s (NASDAQ:ULTA) P/E Ratio?

Julian Fleming

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Ulta Beauty, Inc.’s (NASDAQ:ULTA) P/E ratio to inform your assessment of the investment opportunity. Ulta Beauty has a P/E ratio of 27.2, based on the last twelve months. That is equivalent to an earnings yield of about 3.7%.

View our latest analysis for Ulta Beauty

How Do You Calculate Ulta Beauty’s P/E Ratio?

The formula for P/E is:

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

Or for Ulta Beauty:

P/E of 27.2 = $294.04 ÷ $10.81 (Based on the trailing twelve months to November 2018.)

Is A High P/E 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 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

It’s nice to see that Ulta Beauty grew EPS by a stonking 36% in the last year. And it has bolstered its earnings per share by 26% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

How Does Ulta Beauty’s P/E Ratio Compare To Its Peers?

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 (16.5) for companies in the specialty retail industry is lower than Ulta Beauty’s P/E.

NASDAQGS:ULTA PE PEG Gauge February 6th 19

Its relatively high P/E ratio indicates that Ulta Beauty shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. 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

The ‘Price’ in P/E reflects the market capitalization of the company. 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 Ulta Beauty’s Debt Impact Its P/E Ratio?

Ulta Beauty has net cash of US$297m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Ulta Beauty’s P/E Ratio

Ulta Beauty trades on a P/E ratio of 27.2, which is above the US market average of 16.9. With cash in the bank the company has plenty of growth options — and it is already on the right track. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 they key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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 editorial-team@simplywallst.com.