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 Marten Transport, Ltd.'s (NASDAQ:MRTN) P/E ratio to inform your assessment of the investment opportunity. What is Marten Transport's P/E ratio? Well, based on the last twelve months it is 19.78. That corresponds to an earnings yield of approximately 5.1%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Marten Transport:
P/E of 19.78 = USD22.11 ÷ USD1.12 (Based on the trailing twelve months to December 2019.)
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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
How Does Marten Transport'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 (21.7) for companies in the transportation industry is higher than Marten Transport's P/E.
This suggests that market participants think Marten Transport will underperform other companies in its industry. Since the market seems unimpressed with Marten Transport, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It's great to see that Marten Transport grew EPS by 11% in the last year. And it has bolstered its earnings per share by 16% per year over the last five years. This could arguably justify a relatively high P/E ratio.
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. 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 investing in growth. That means taking on debt (or spending its cash).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting Marten Transport's P/E?
Since Marten Transport holds net cash of US$32m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Marten Transport's P/E Ratio
Marten Transport has a P/E of 19.8. That's around the same as the average in the US market, which is 18.4. Considering its recent growth, alongside its lack of debt, it would appear that the market isn't very excited about the future.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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