What Does Ciena Corporation's (NYSE:CIEN) P/E Ratio Tell You?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Ciena Corporation's (NYSE:CIEN) P/E ratio to inform your assessment of the investment opportunity. Ciena has a price to earnings ratio of 32.43, based on the last twelve months. That means that at current prices, buyers pay $32.43 for every $1 in trailing yearly profits.

See our latest analysis for Ciena

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Ciena:

P/E of 32.43 = $43.52 ÷ $1.34 (Based on the year to April 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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.

Ciena shrunk earnings per share by 75% over the last year. But over the longer term (3 years), earnings per share have increased by 144%.

How Does Ciena's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Ciena has a higher P/E than the average (28.6) P/E for companies in the communications industry.

That means that the market expects Ciena will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

How Does Ciena's Debt Impact Its P/E Ratio?

Since Ciena holds net cash of US$125m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Ciena's P/E Ratio

Ciena trades on a P/E ratio of 32.4, which is above the US market average of 17.9. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Ciena. 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.