U.S. Markets closed

Despite Its High P/E Ratio, Is New Oriental Education & Technology Group Inc. (NYSE:EDU) 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). To keep it practical, we'll show how New Oriental Education & Technology Group Inc.'s (NYSE:EDU) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, New Oriental Education & Technology Group has a P/E ratio of 59.98. That means that at current prices, buyers pay $59.98 for every $1 in trailing yearly profits.

Check out our latest analysis for New Oriental Education & Technology Group

How Do I Calculate New Oriental Education & Technology Group's Price To Earnings Ratio?

The formula for P/E is:

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

Or for New Oriental Education & Technology Group:

P/E of 59.98 = $122.76 ÷ $2.05 (Based on the trailing twelve months to August 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does New Oriental Education & Technology Group Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, New Oriental Education & Technology Group has a higher P/E than the average company (29.3) in the consumer services industry.

NYSE:EDU Price Estimation Relative to Market, December 17th 2019

Its relatively high P/E ratio indicates that New Oriental Education & Technology Group shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Most would be impressed by New Oriental Education & Technology Group earnings growth of 24% in the last year. And its annual EPS growth rate over 5 years is 9.7%. So one might expect an above average P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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).

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).

How Does New Oriental Education & Technology Group's Debt Impact Its P/E Ratio?

New Oriental Education & Technology Group has net cash of US$3.2b. This is fairly high at 17% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On New Oriental Education & Technology Group's P/E Ratio

New Oriental Education & Technology Group's P/E is 60.0 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. 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

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 New Oriental Education & Technology Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.