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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 Skyworks Solutions, Inc.'s (NASDAQ:SWKS) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Skyworks Solutions has a P/E ratio of 14.4. In other words, at today's prices, investors are paying $14.4 for every $1 in prior year profit.
See our latest analysis for Skyworks Solutions
How Do You Calculate Skyworks Solutions's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Skyworks Solutions:
P/E of 14.4 = $90.79 ÷ $6.31 (Based on the trailing twelve months to December 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 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
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Notably, Skyworks Solutions grew EPS by a whopping 41% in the last year. And its annual EPS growth rate over 5 years is 31%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
How Does Skyworks Solutions's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (21.3) for companies in the semiconductor industry is higher than Skyworks Solutions's P/E.
This suggests that market participants think Skyworks Solutions will underperform other companies in its industry. Since the market seems unimpressed with Skyworks Solutions, 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.