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Despite Its High P/E Ratio, Is ASGN Incorporated (NYSE:ASGN) Still Undervalued?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at ASGN Incorporated's (NYSE:ASGN) P/E ratio and reflect on what it tells us about the company's share price. ASGN has a price to earnings ratio of 20.22, based on the last twelve months. In other words, at today's prices, investors are paying $20.22 for every $1 in prior year profit.

See our latest analysis for ASGN

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for ASGN:

P/E of 20.22 = $66.56 ÷ $3.29 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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.'

Does ASGN Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that ASGN has a P/E ratio that is roughly in line with the professional services industry average (19.5).

NYSE:ASGN Price Estimation Relative to Market, September 14th 2019

That indicates that the market expects ASGN will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.

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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

ASGN saw earnings per share improve by -4.1% last year. And earnings per share have improved by 20% annually, over the last five years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 ASGN's Debt Impact Its P/E Ratio?

ASGN has net debt equal to 28% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On ASGN's P/E Ratio

ASGN has a P/E of 20.2. That's higher than the average in its market, which is 18.3. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.

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.