Yahoo Finance Do You Like Magna International Inc (TSE:MG) At This P/E Ratio?
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 Magna International Inc’s (TSE:MG) P/E ratio to inform your assessment of the investment opportunity. Magna International has a P/E ratio of 7.53, based on the last twelve months. That corresponds to an earnings yield of approximately 13%.
Check out our latest analysis for Magna International
How Do You Calculate Magna International’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Magna International:
P/E of 7.53 = $49.64 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $6.59 (Based on the year to June 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
Earnings growth rates have a big influence on P/E ratios. 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.
It’s great to see that Magna International grew EPS by 20% in the last year. And its annual EPS growth rate over 5 years is 13%. So one might expect an above average P/E ratio.
How Does Magna International’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 (12.1) for companies in the auto components industry is higher than Magna International’s P/E.
Its relatively low P/E ratio indicates that Magna International shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Magna International’s Balance Sheet
Magna International’s net debt is 22% of its market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Verdict On Magna International’s P/E Ratio
Magna International trades on a P/E ratio of 7.5, which is below the CA market average of 14.8. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Magna International. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
