Despite Its High P/E Ratio, Is Marine Products Corporation (NYSE:MPX) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Marine Products Corporation’s (NYSE:MPX) P/E ratio could help you assess the value on offer. Marine Products has a price to earnings ratio of 17.78, based on the last twelve months. In other words, at today’s prices, investors are paying $17.78 for every $1 in prior year profit.

View our latest analysis for Marine Products

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Marine Products:

P/E of 17.78 = $14.67 ÷ $0.83 (Based on the year 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 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

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Notably, Marine Products grew EPS by a whopping 49% in the last year. And its annual EPS growth rate over 5 years is 26%. I’d therefore be a little surprised if its P/E ratio was not relatively high.

How Does Marine Products’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (17.6) for companies in the leisure industry is roughly the same as Marine Products’s P/E.

That indicates that the market expects Marine Products will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

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

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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 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.

Is Debt Impacting Marine Products’s P/E?

Marine Products has net cash of US$12m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Marine Products’s P/E Ratio

Marine Products has a P/E of 17.8. That’s around the same as the average in the US market, which is 17.6. Considering its recent growth, alongside its lack of debt, it would appear that the market isn’t very excited about the future.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visual report on analyst forecasts could hold the key to an excellent investment decision.