Here’s What Check Point Software Technologies Ltd’s (NASDAQ:CHKP) P/E Ratio Is Telling Us
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Check Point Software Technologies Ltd’s (NASDAQ:CHKP) P/E ratio and reflect on what it tells us about the company’s share price. Check Point Software Technologies has a price to earnings ratio of 20.7, based on the last twelve months. In other words, at today’s prices, investors are paying $20.7 for every $1 in prior year profit.
View our latest analysis for Check Point Software Technologies
How Do You Calculate Check Point Software Technologies’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Check Point Software Technologies:
P/E of 20.7 = $107.85 ÷ $5.21 (Based on the trailing twelve months 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. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Check Point Software Technologies’s earnings per share grew by -9.0% in the last twelve months. And earnings per share have improved by 10% annually, over the last five years.
How Does Check Point Software Technologies’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Check Point Software Technologies has a lower P/E than the average (45) in the software industry classification.
This suggests that market participants think Check Point Software Technologies will underperform other companies in its industry. Since the market seems unimpressed with Check Point Software Technologies, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. 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.
How Does Check Point Software Technologies’s Debt Impact Its P/E Ratio?
Check Point Software Technologies has net cash of US$1.8b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Check Point Software Technologies’s P/E Ratio
Check Point Software Technologies trades on a P/E ratio of 20.7, which is above the US market average of 17.9. Recent earnings growth wasn’t bad. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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 editorial-team@simplywallst.com.
