【breckenridge hotels with air conditioning】Should You Be Tempted To Sell American States Water Company (NYSE:AWR) Because Of Its P/E Ratio?

This breckenridge hotels with air conditioningarticle is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at American States Water Company’s (

NYSE:AWR

) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months,

American States Water’s P/E ratio is 39.15

. That is equivalent to an earnings yield of about 2.6%.

Check out our latest analysis for American States Water

How Do I Calculate A Price To Earnings Ratio?

The

formula for P/E

is:

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

Or for American States Water:

P/E of 39.15 = $66.76 ÷ $1.71 (Based on the trailing twelve months 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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. 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 earnings.

American States Water shrunk earnings per share by 7.3% last year. But EPS is up 3.2% over the last 5 years.

How Does American States Water’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that American States Water has a higher P/E than the average (28.1) P/E for companies in the water utilities industry.

NYSE:AWR PE PEG Gauge January 2nd 19

That means that the market expects American States Water will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as

whether company directors have been buying shares

.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

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. 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).

Story continues

American States Water’s Balance Sheet

Net debt totals 16% of American States Water’s 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 American States Water’s P/E Ratio

American States Water trades on a P/E ratio of 39.2, which is above the US market average of 16. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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.

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

[email protected]

.

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