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Despite Its High P/E Ratio, Is Capitol Federal Financial, Inc. (NASDAQ:CFFN) Still Undervalued?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Capitol Federal Financial, Inc.’s (NASDAQ:CFFN) P/E ratio and reflect on what it tells us about the company’s share price. Capitol Federal Financial has a price to earnings ratio of 17.95, based on the last twelve months. That is equivalent to an earnings yield of about 5.6%.

View our latest analysis for Capitol Federal Financial

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 Capitol Federal Financial:

P/E of 17.95 = $13.18 ÷ $0.73 (Based on the trailing twelve months to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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.

Capitol Federal Financial increased earnings per share by an impressive 17% over the last twelve months. And earnings per share have improved by 7.7% annually, over the last five years. So one might expect an above average P/E ratio.

How Does Capitol Federal Financial’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (17.3) for companies in the mortgage industry is roughly the same as Capitol Federal Financial’s P/E.

NasdaqGS:CFFN PE PEG Gauge December 11th 18

That indicates that the market expects Capitol Federal Financial 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. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Capitol Federal Financial’s P/E?

Net debt totals a substantial 115% of Capitol Federal Financial’s market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On Capitol Federal Financial’s P/E Ratio

Capitol Federal Financial’s P/E is 18 which is about average (17.2) in the US market. While it does have meaningful debt levels, it has also produced strong earnings growth recently. The P/E suggests the market isn’t confident that growth will be sustained, though.

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 visual report on analyst forecasts could hold they key to an excellent investment decision.

Of course you might be able to find a better stock than Capitol Federal Financial. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.