Yahoo Finance Do You Like Norwegian Cruise Line Holdings Ltd (NYSE:NCLH) At This P/E Ratio?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Norwegian Cruise Line Holdings Ltd’s (NYSE:NCLH) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Norwegian Cruise Line Holdings’s P/E ratio is 12.34. That is equivalent to an earnings yield of about 8.1%.
Check out our latest analysis for Norwegian Cruise Line Holdings
How Do I Calculate Norwegian Cruise Line Holdings’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Norwegian Cruise Line Holdings:
P/E of 12.34 = $49.27 ÷ $3.99 (Based on the year to September 2018.)
Is A High Price-to-Earnings 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s great to see that Norwegian Cruise Line Holdings grew EPS by 24% in the last year. And it has bolstered its earnings per share by 28% per year over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Norwegian Cruise Line Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Norwegian Cruise Line Holdings has a lower P/E than the average (16.4) P/E for companies in the hospitality industry.
This suggests that market participants think Norwegian Cruise Line Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
How Does Norwegian Cruise Line Holdings’s Debt Impact Its P/E Ratio?
Norwegian Cruise Line Holdings’s net debt is 56% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Norwegian Cruise Line Holdings’s P/E Ratio
Norwegian Cruise Line Holdings trades on a P/E ratio of 12.3, which is below the US market average of 17.9. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than Norwegian Cruise Line Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
