This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use TransAct Technologies Incorporated’s (NASDAQ:TACT) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, TransAct Technologies’s P/E ratio is 17.63. That means that at current prices, buyers pay $17.63 for every $1 in trailing yearly profits.
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How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for TransAct Technologies:
P/E of 17.63 = $9.58 ÷ $0.54 (Based on the year to September 2018.)
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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
TransAct Technologies saw earnings per share decrease by 19% last year. But over the longer term (5 years) earnings per share have increased by 13%.
How Does TransAct Technologies’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that TransAct Technologies has a higher P/E than the average (15.2) P/E for companies in the tech industry.
That means that the market expects TransAct Technologies will outperform other companies in its industry. 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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.
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.
TransAct Technologies’s Balance Sheet
TransAct Technologies has net cash of US$3.8m. 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 TransAct Technologies’s P/E Ratio
TransAct Technologies trades on a P/E ratio of 17.6, which is fairly close to the US market average of 16.8. While the absence of growth in the last year is probably causing a degree of pessimism, the healthy balance sheet means the company retains potential for future growth. So it’s not surprising to see it trade on a P/E roughly in line with the market.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ 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.
Of course you might be able to find a better stock than TransAct Technologies. 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 email@example.com.