The Cirrus Logic (NASDAQ:CRUS) share price has done well in the last month, posting a gain of 39%. That brought the twelve month gain to a very sharp 75%.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Cirrus Logic's P/E Ratio Compare To Its Peers?
Cirrus Logic's P/E of 36.41 indicates some degree of optimism towards the stock. The image below shows that Cirrus Logic has a higher P/E than the average (30.5) P/E for companies in the semiconductor industry.
Its relatively high P/E ratio indicates that Cirrus Logic shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Cirrus Logic increased earnings per share by an impressive 24% over the last twelve months. And earnings per share have improved by 14% annually, over the last five years. So one might expect an above average P/E ratio. In contrast, EPS has decreased by 7.8%, annually, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Cirrus Logic's Debt Impact Its P/E Ratio?
Cirrus Logic has net cash of US$245m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Cirrus Logic's P/E Ratio
Cirrus Logic has a P/E of 36.4. That's higher than the average in its market, which is 18.0. With cash in the bank the company has plenty of growth options -- and it is already on the right track. Therefore it seems reasonable that the market would have relatively high expectations of the company What we know for sure is that investors have become much more excited about Cirrus Logic recently, since they have pushed its P/E ratio from 26.2 to 36.4 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Cirrus Logic. So you may wish to see this free collection of other companies that have grown earnings strongly.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.