【epoxy or fiberglass surfboard】Does Cohu, Inc.’s (NASDAQ:COHU) P/E Ratio Signal A Buying Opportunity?

This epoxy or fiberglass surfboardarticle is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Cohu, Inc.’s (

NASDAQ:COHU

) P/E ratio to inform your assessment of the investment opportunity.

Cohu has a price to earnings ratio of 14.44

, based on the last twelve months. That means that at current prices, buyers pay $14.44 for every $1 in trailing yearly profits.

Check out our latest analysis for Cohu

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 Cohu:

P/E of 14.44 = $15.81 ÷ $1.1 (Based on the year to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying

a higher price

for each $1 of company earnings. 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 Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

Cohu increased earnings per share by 5.6% last year. And its annual EPS growth rate over 5 years is 61%.

How Does Cohu’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (17) for companies in the semiconductor industry is higher than Cohu’s P/E.

NasdaqGS:COHU PE PEG Gauge January 2nd 19

Its relatively low P/E ratio indicates that Cohu shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check

if company insiders have been buying or selling

.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. 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 taking on debt (or spending its remaining cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Story continues

Is Debt Impacting Cohu’s P/E?

Since Cohu holds net cash of US$163m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Cohu’s P/E Ratio

Cohu has a P/E of 14.4. That’s below the average in the US market, which is 16. Recent earnings growth wasn’t bad. And the net cash position gives the company many options. So it’s strange that the low P/E indicates low expectations. Given analysts are expecting further growth, one might have expected a higher P/E ratio.

That may be worth further research

.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

But note:

Cohu may not be the best stock to buy

. So take a peek at this

free

list of interesting companies with strong recent earnings growth (and a P/E ratio 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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