This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at WEC Energy Group, Inc.'s (NYSE:WEC) P/E ratio and reflect on what it tells us about the company's share price. WEC Energy Group has a P/E ratio of 28.33, based on the last twelve months. That is equivalent to an earnings yield of about 3.5%.
How Do I Calculate WEC Energy Group's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for WEC Energy Group:
P/E of 28.33 = USD101.87 ÷ USD3.60 (Based on the trailing twelve months to December 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each USD1 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.
Does WEC Energy Group 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 integrated utilities industry is lower than WEC Energy Group's P/E.
Its relatively high P/E ratio indicates that WEC Energy Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
WEC Energy Group saw earnings per share improve by -7.1% last year. And earnings per share have improved by 6.6% annually, over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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.
WEC Energy Group's Balance Sheet
WEC Energy Group has net debt equal to 39% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On WEC Energy Group's P/E Ratio
WEC Energy Group's P/E is 28.3 which is above average (18.4) in its market. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than WEC Energy Group. 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).
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.
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