This stick time rmuarticle is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use nVent Electric plc’s (
NYSE:NVT
) P/E ratio to inform your assessment of the investment opportunity.
nVent Electric has a P/E ratio of 12.33
, based on the last twelve months. That corresponds to an earnings yield of approximately 8.1%.
Check out our latest analysis for nVent Electric
How Do I Calculate A Price To Earnings Ratio?
The
formula for price to earnings
is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for nVent Electric:
P/E of 12.33 = $21.98 ÷ $1.78 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay
a higher price
for the earning power of the business. 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
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. Then, a lower P/E should attract more buyers, pushing the share price up.
nVent Electric increased earnings per share by a whopping 28% last year.
How Does nVent Electric’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see nVent Electric has a lower P/E than the average (14.6) in the electrical industry classification.
NYSE:NVT PE PEG Gauge January 1st 19
This suggests that market participants think nVent Electric will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor
director buying and 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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Story continues
How Does nVent Electric’s Debt Impact Its P/E Ratio?
nVent Electric has net debt worth 21% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On nVent Electric’s P/E Ratio
nVent Electric’s P/E is 12.3 which is below average (16) in the US market. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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
.
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