Yahoo Finance Is Air New Zealand Limited's (NZSE:AIR) P/E Ratio Really That Good?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Air New Zealand Limited's (NZSE:AIR) P/E ratio and reflect on what it tells us about the company's share price. Air New Zealand has a P/E ratio of 9.93, based on the last twelve months. That means that at current prices, buyers pay NZ$9.93 for every NZ$1 in trailing yearly profits.
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View our latest analysis for Air New Zealand
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Air New Zealand:
P/E of 9.93 = NZ$2.74 ÷ NZ$0.28 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Air New Zealand saw earnings per share decrease by 14% last year. But over the longer term (5 years) earnings per share have increased by 6.3%. And EPS is down 17% a year, over the last 3 years. This might lead to low expectations.
How Does Air New Zealand's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Air New Zealand has a lower P/E than the average (11.1) P/E for companies in the airlines industry.
This suggests that market participants think Air New Zealand will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).
Is Debt Impacting Air New Zealand's P/E?
Air New Zealand's net debt is 52% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Air New Zealand's P/E Ratio
Air New Zealand trades on a P/E ratio of 9.9, which is below the NZ market average of 18.2. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Air New Zealand. 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.
