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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 The Scotts Miracle-Gro Company's (NYSE:SMG) P/E ratio
could help you assess the value on offer. Scotts
Miracle-Gro has a price to earnings ratio of 16.83, based
on the last twelve months. That means that at current prices,
buyers pay $16.83 for every $1 in trailing yearly profits.
View our latest analysis
for Scotts Miracle-Gro
The formula for price to
Price to Earnings Ratio = Share Price Ã· Earnings
per Share (EPS)
Or for Scotts Miracle-Gro:
P/E of 16.83 = $94 Ã· $5.58 (Based on the trailing
twelve months to March 2019.)
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.
Earnings growth rates have a big influence on P/E
ratios. That's because companies that grow earnings per share
quickly will rapidly increase the 'E' in the equation. Therefore,
even if you pay a high multiple of earnings now, that multiple will
become lower in the future. So while a stock may look expensive
based on past earnings, it could be cheap based on future
It's nice to see that Scotts Miracle-Gro grew EPS
by a stonking 38% in the last year. And earnings per share have
improved by 13% annually, over the last five years. With that
performance, I would expect it to have an above average P/E
The P/E ratio essentially measures market
expectations of a company. You can see in the image below that the
average P/E (17.3) for companies in the chemicals industry is
roughly the same as Scotts Miracle-Gro's P/E.
Scotts Miracle-Gro's P/E tells us that market
participants think its prospects are roughly in line with its
industry. The company could surprise by performing better than
average, in the future. Checking factors such as the tenure of the board and
management could help you form your own view on if
that will happen.
It's important to note that the P/E ratio
considers the market capitalization, not the enterprise value.
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 investing in growth. That means taking
on debt (or spending its 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.
Net debt is 45% of Scotts Miracle-Gro's market
cap. You'd want to be aware of this fact, but it doesn't bother
Scotts Miracle-Gro's P/E is 16.8 which is about
average (17.5) in the US market. With only modest debt levels, and
strong earnings growth, the market seems to doubt that the growth
can be maintained. Given analysts are expecting further growth, one
might have expected a higher P/E ratio. That may be worth further
Investors have an opportunity when market
expectations about a stock are wrong. If it is underestimating a
company, investors can make money by buying and holding the shares
until the market corrects itself. So this free
report on the analyst
consensus forecasts could help you make a master
move on this stock.
Of course, you might find a fantastic
investment by looking at a few good candidates. So take a
peek at this free list of companies with
modest (or no) debt, trading on a P/E below 20.
We aim to bring you long-term focused research
analysis driven by fundamental data. Note that our analysis may not
factor in the latest price-sensitive company announcements or
If you spot an error that warrants correction, please contact
the editor at
[email protected] This article by Simply Wall St
is general in nature. It does not constitute a recommendation to
buy or sell any stock, and does not take account of your
objectives, or your financial situation. Simply Wall St has no
position in the stocks mentioned. Thank you for reading.