Yahoo Finance Should We Worry About Donaldson Company, Inc.'s (NYSE:DCI) P/E Ratio?
Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Donaldson Company, Inc.'s (NYSE:DCI) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Donaldson Company's P/E ratio is 21.13. That corresponds to an earnings yield of approximately 4.7%.
Check out our latest analysis for Donaldson Company
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 Donaldson Company:
P/E of 21.13 = $50.06 ÷ $2.37 (Based on the year to January 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's nice to see that Donaldson Company grew EPS by a stonking 128% in the last year. And its annual EPS growth rate over 3 years is 5.8%. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 1.7% a year, over 5 years.
How Does Donaldson Company's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (20.8) for companies in the machinery industry is roughly the same as Donaldson Company's P/E.
Donaldson Company'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. I inform my view byby checking management tenure and remuneration, among other things.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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).
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 Donaldson Company's Debt Impact Its P/E Ratio?
Donaldson Company has net debt worth just 7.9% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Donaldson Company's P/E Ratio
Donaldson Company has a P/E of 21.1. That's higher than the average in the US market, which is 17.7. While the company does use modest debt, its recent earnings growth is impressive. Therefore it seems reasonable that the market would have relatively high expectations of the company
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Donaldson Company. 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).
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 qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
