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Today, we will present the concept of the P / E ratio for those who are learning to invest. To keep it practical, we'll show you how the P / E ratio of The Clorox Company (NYSE: CLX) can help you evaluate the value proposed. Looking at the incomes of the last twelve months, Clorox has a P / E ratio of 24.13. In other words, at today's prices, investors are paying $ 24.13 for every dollar of profit last year.
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How to calculate the C / B ratio of Clorox?
the price formula at the profit is:
Price / earnings ratio = Price per share ÷ Earnings per share (EPS)
Or for Clorox:
P / E of 24.13 = $ 149.63 6.2 $ 6.2 (based on the year up to March 2019)
Is a high price-earnings ratio good?
Higher P / E ratio means investors pay a higher price for every dollar earned by the company. This is not a good or a bad thing in itselfbut a high P / E means that buyers are optimistic about the future.
How growth rates affect P / E ratios
Earnings growth rates have a big influence on P / E ratios. This is because companies that are rapidly increasing earnings per share will quickly increase the "E" in the equation. And in this case, the P / E ratio itself will decrease quite rapidly. Thus, even though an action may seem expensive based on past earnings, it may be cheap based on future earnings.
Clorox experienced relatively stable EPS growth over the past year. But EPS is up 6.4% over the last 5 years.
Does Clorox have a relatively high or low P / E for its industry?
The P / E ratio essentially measures a company's market expectations. As you can see below, Clorox has a P / E ratio fairly close to the household goods industry average, which is 24.1.
This indicates that the market expects Clorox to achieve similar performances to those of other companies in its sector. If the company has better than average prospects, the market could underestimate them. Other research on factors such asmanagement mandatecould help you make up your mind about the likelihood of this happening.
Do not forget: the P / E ratios do not take into account the balance sheet
It is important to note that the P / E ratio takes into account the market capitalization and not the value of the business. Thus, the measure does not reflect the liquidity or the debts held by the company. In theory, a company can reduce its future P / E ratio by using cash or debt to invest in growth.
These expenses may be good or bad in the long run, but the fact is that the balance sheet does not reflect this ratio.
Review of Clorox
Clorox's net debt represents 13% of its market capitalization. This could lead to additional risks and reduce the number of investment options for management; It is worth remembering if you compare his P / E to debt free companies.
The balance sheet of the C / B ratio of Clorox
Clorox trades on a P / E ratio of 24.1, which is above the US market average of 17.4. With a modest debt but no EPS growth over the past year, it is fair to say that the P / E ratio suggests optimism about future market profits.
When the market is wrong with regard to a stock, this offers an opportunity to savvy investors. If the reality of a business is better than expected, you can make money by buying and retaining long-term badets. So that free A visual report on the badysts' forecasts could be the key to an excellent investment decision.
You may be able to find a better buy than Clorox. If you want a selection of possible winners, look at this free list of interesting companies that trade on a P / E below 20 (but have proven that they can increase their profits).
Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.
If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.
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