Does Universal Forest Products, Inc. (NASDAQ:UFPI) Have A Good P/E Ratio?

Simply Wall St

Mon, Jul 15, 2019, 5:41 AM

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 Universal Forest Products, Inc.'s (NASDAQ:UFPI) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Universal Forest Products has a P/E ratio of 15.09. That means that at current prices, buyers pay $15.09 for every $1 in trailing yearly profits.

See our latest analysis for Universal Forest Products

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Universal Forest Products:

P/E of 15.09 = $37 ÷ $2.45 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.

How Does Universal Forest Products'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 Universal Forest Products has a lower P/E than the average (18.2) in the building industry classification.

NasdaqGS:UFPI Price Estimation Relative to Market, July 15th 2019

Universal Forest Products's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Universal Forest Products, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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 unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Universal Forest Products increased earnings per share by an impressive 15% over the last twelve months. And it has bolstered its earnings per share by 27% per year over the last five years. So one might expect an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.