Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Marshall Motor Holdings Plc's (LON:MMH) P/E ratio to inform your assessment of the investment opportunity. Marshall Motor Holdings has a P/E ratio of 9.21, based on the last twelve months. That means that at current prices, buyers pay £9.21 for every £1 in trailing yearly profits.
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See our latest analysis for Marshall Motor Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Marshall Motor Holdings:
P/E of 9.21 = £1.65 ÷ £0.18 (Based on the year to December 2018.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Notably, Marshall Motor Holdings grew EPS by a whopping 46% in the last year. Unfortunately, earnings per share are down 45% a year, over 5 years.
How Does Marshall Motor Holdings's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (11.2) for companies in the specialty retail industry is higher than Marshall Motor Holdings's P/E.
Marshall Motor Holdings'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 Marshall Motor Holdings, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.