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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use AstroNova, Inc.’s (NASDAQ:ALOT) P/E ratio to inform your assessment of the investment opportunity. AstroNova has a price to earnings ratio of 30.49, based on the last twelve months. That is equivalent to an earnings yield of about 3.3%.
Check out our latest analysis for AstroNova
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for AstroNova:
P/E of 30.49 = $18.1 ÷ $0.59 (Based on the year to October 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
AstroNova increased earnings per share by an impressive 23% over the last twelve months. And it has bolstered its earnings per share by 7.2% per year over the last five years. So one might expect an above average P/E ratio. In contrast, EPS has decreased by 4.0%, annually, over 3 years.
How Does AstroNova’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, AstroNova has a higher P/E than the average company (14.9) in the tech industry.
Its relatively high P/E ratio indicates that AstroNova 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. 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.