However, some industries traditionally sell with low price-to-sales ratios. Companies in these industries typically have low profit margins (income divided by sales), such as supermarkets or firms with very poor sales growth prospects. A simple screen for just a low price-to-sales ratio will tend to turn up many of these firms. That is why we focus on companies with Day trading patterns current price-to-sales ratios below their historical average and below the norm for their industry. Another important limitation of price-to-earnings ratios is one that lies within the formula for calculating P/E itself. Accurate and unbiased presentations of P/E ratios rely on accurate inputs of the market value of shares and accurate earnings per share estimates.
Nothing about the stock market is guaranteed, ever, but during periods of tremendous volatility, equities with squeaky clean balance sheets tend to show up on the value screens of large investors. With that kind of feeling in mind, here are 5 stocks with low price/earnings ratios and no or almost no debt. You might look at a sector like tech which has a P/E ratio approaching 40 and see stock prices rising faster than the market average. But this doesn’t mean that high P/E stocks outperform low P/E ones. Consider the current market environment and trends, like how recent advances in artificial intelligence boost large tech stocks.
Limitations of Using the P/E Ratio
At a time when the price-earnings ratio for the S&P 500 is 39, it’s semi-amazing that Dow’s p/e is all the way down there at 7. Along with AT&T and T-Mobile, they provide the majority of mobile-phone services in the U.S. Verizon generated more than $135 billion in revenue in 2022 and the stock comes with a high dividend. Higher interest rates could hurt Verizon’s heavy debt load, however, as it is forced to pay more on its borrowings. Compared to the rates of broad indices like the S&P 500, 10 is a relatively low P/E ratio. For example, 10 would be considered in line with the industry average in the banking sector.
In 2021, it was not unusual to see companies reporting earnings 20% above what analysts were expecting. That is much closer to the historic earnings growth range of roughly 6%. In the case of Netflix, the business environment is becoming more challenging, so there is good reason for investors to be cautious. However, many companies still face good business climates but multiples have been dramatically cut as well. The prospects of a lower multiple due to higher rates is one problem, but when you combine that with a less rosy business outlook the results can be very dramatic.
- Nvidia’s stock has more than tripled this year amid soaring demand for its top-of-the-line processors used to power generative AI technologies that can read and write in human-like ways.
- Theoretically, a low P/E ratio is better than a high one, but understand the context of these numbers and use them appropriately.
- Since 2009, the S&P 500 has averaged gains of roughly 15% a year, well above the historic returns of roughly 10% a year.
- A higher PE ratio means that investors are paying more for each unit of net income, making it more expensive to purchase than a stock with a lower P/E ratio.
- If other app companies enter the market with their own versions of the service, the company that manages to attract and hold the largest number of users has a greater potential for becoming a growth stock.
We’ll make another cut to include only companies whose current forward P/E ratios are at least 20% below their 10-year averages, according to FactSet. If a stock has been listed for less than 10 years, we have used the average forward P/E for the entire period. Companies that aren’t profitable and, consequently, have no earnings—or negative earnings per share—pose a challenge when it comes to calculating their P/E. The relative P/E compares the current absolute P/E to a benchmark or a range of past P/Es over a relevant time period, such as the past 10 years. The relative P/E shows what portion or percentage of the past P/Es the current P/E has reached.
The relative P/E will have a value below 100% if the current P/E is lower than the past value (whether the past high or low). If the relative P/E measure is 100% or more, this tells investors that the current P/E has reached or surpassed the past value. Every investor wants an edge in predicting a company’s future, but a company’s earnings guidance statements may not be a reliable source. In other words, the bottom line here is that the stock reflects a good deal of weaknesses that has yet to show up in the company’s underlying sales performance.
P/E ratios have ranged between 13 and 62 over the last five years. The current P/E ratio of 30.5 is near the lower to middle portion of that range, indicating a fair value. The forward P/E ratio is attractive at 23.0 if the company continues to increase earnings over the next several years. Sales have grown over recent years and earnings had a substantial jump in 2022 following a decline in 2021. Analysts predict another jump in 2023 followed by a 10.7% EPS increase in 2024.
Dividend Stocks: Royal Bank of Canada (RY)
Before investing, it is wise to use a variety of financial ratios to determine whether a stock is fairly valued and whether a company’s financial health justifies its stock valuation. Investors should thus commit money based on future earnings power, not the past. The fact that the EPS number remains constant, while the stock prices fluctuate, is also a problem. If a major company event drives the stock price significantly higher or lower, the trailing P/E will be less reflective of those changes.
The company has a solid financial health rating of “B” from Morningstar, and it has the highest stock buyback yield on the list at 9.3% over the last year. Unfortunately, these studies have produced conflicting results when several factors are taken into account, namely geography and time period. Studies conclude that expected inflation can either positively or negatively impact stocks, depending on the time period, along with an investor’s ability to hedge and the government’s monetary policy. Stable and moderate inflation means a higher probability of continued economic expansion. Modest inflation usually means that the central bank won’t be raising interest rates to slow economic growth. When inflation and interest rates are low, there is a greater opportunity for higher real earnings growth, increasing the amount people will pay for a company’s earnings.
Interpreting a Low P/E Ratio: What Does it Mean?
I a company changes its accounting systems or policies, that might change the P/E ratio. Similarly, changes in depreciation or amortization policies in a particular year or a market trend might cause companies to report a negative P/E ratio temporarily. A high P/E ratio could be an indicator that investors expect earnings growth in the coming quarters because they have bought stock in anticipation of its appreciation. As a hypothetical example, a growth stock would be a biotech startup that has begun work on a promising new cancer treatment.
Some industries traditionally sell with low price-to-sales ratios. To help take industry factors into account, our filter looks for companies whose price-to-sales ratios are below the median for their https://investmentsanalysis.info/ industry. Price-to-sales levels are tied to expectations of future company growth, profitability and risk. The higher the expected growth, the higher the price-to-sales ratio that a stock can support.
A low P/E ratio means that investors spend less to “purchase” those dollars of profit when buying the stock. These companies generate cash for investors while also trading at a discount compared to the overall market. But, most importantly, these stocks give investors the ability to compound earnings with dividends. However, this doesn’t mean that stocks with high P/E ratios cannot turn out to be good investments.
What Is a P/E Ratio?
Growth stocks may have low or even negative earnings, often making the high P/E stocks. You can find growth stocks trading on any exchange and in any industrial sector—but you’ll usually find them in the fastest-growing industries and on more innovative exchanges like the Nasdaq. At that price, Nvidia shares are trading at the equivalent of around 33 times expected earnings over the next 12 months, according to Refinitiv data.
Examining historical returns data during periods of high and low inflation can provide some clarity for investors. Numerous studies have looked at the impact of inflation on stock returns. Price-to-sales ratios do not generally work very well with companies such as banks, real estate investment trusts (REITs) or other firms where ongoing sales are not a key driving force.
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He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Railroad giant CSX, paint manufacturer Sherwin-Williams, coatings maker PPG, and water treatment giant Ecolab all reported significantly higher costs in their earnings reports. Some, like CSX, saw higher costs due to fuel and labor costs, but were able to offset those costs with price increases. The pressure on market multiples and earnings is likely to continue.
There are two other big reasons revenue-based valuation methodologies have a following. First, they are among the least likely of valuation measures to have a negative or otherwise unusable value. A temporary loss will make earnings-based valuation ratios meaningless. Second, revenue-based valuation measures tend to be less volatile than earnings-based valuation measures. Then we’ll narrow to 33 companies trading at forward P/E ratios of 10.0 or less.