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Does Booz Allen Hamilton Holding Corporation's (NYSE:BAH) P/E Ratio Signal A Buying Opportunity?

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 Booz Allen Hamilton Holding Corporation's (NYSE:BAH) P/E ratio could help you assess the value on offer. Based on the last twelve months, Booz Allen Hamilton Holding's P/E ratio is 23.86. That means that at current prices, buyers pay $23.86 for every $1 in trailing yearly profits.

Check out our latest analysis for Booz Allen Hamilton Holding

How Do I Calculate Booz Allen Hamilton Holding's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Booz Allen Hamilton Holding:

P/E of 23.86 = $76.66 ÷ $3.21 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings 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. 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 Does Booz Allen Hamilton Holding's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (31.9) for companies in the it industry is higher than Booz Allen Hamilton Holding's P/E.

NYSE:BAH Price Estimation Relative to Market, January 11th 2020
NYSE:BAH Price Estimation Relative to Market, January 11th 2020

This suggests that market participants think Booz Allen Hamilton Holding will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Notably, Booz Allen Hamilton Holding grew EPS by a whopping 31% in the last year. And earnings per share have improved by 15% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.

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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Booz Allen Hamilton Holding's Balance Sheet Tell Us?

Net debt totals 13% of Booz Allen Hamilton Holding's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Verdict On Booz Allen Hamilton Holding's P/E Ratio

Booz Allen Hamilton Holding trades on a P/E ratio of 23.9, which is above its market average of 18.7. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Booz Allen Hamilton Holding. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.

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