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Here's What Watts Water Technologies, Inc.'s (NYSE:WTS) P/E Is Telling Us

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Watts Water Technologies, Inc.'s (NYSE:WTS) P/E ratio and reflect on what it tells us about the company's share price. Watts Water Technologies has a P/E ratio of 24.67, based on the last twelve months. That corresponds to an earnings yield of approximately 4.1%.

See our latest analysis for Watts Water Technologies

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:


Or for Watts Water Technologies:

P/E of 24.67 = $94.79 ÷ $3.84 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?


Does Watts Water Technologies Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below, Watts Water Technologies has a higher P/E than the average company (20.7) in the machinery industry.

NYSE:WTS Price Estimation Relative to Market, September 23rd 2019

That means that the market expects Watts Water Technologies will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or 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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Notably, Watts Water Technologies grew EPS by a whopping 49% in the last year. And it has bolstered its earnings per share by 17% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.




So What Does Watts Water Technologies's Balance Sheet Tell Us?

Watts Water Technologies has net debt worth just 5.5% 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 Bottom Line On Watts Water Technologies's P/E Ratio

Watts Water Technologies has a P/E of 24.7. That's higher than the average in its market, which is 17.9. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.


Of course you might be able to find a better stock than Watts Water Technologies. So you may wish to see this free collection of other companies that have grown earnings strongly.

