Does Electronic Arts Inc.'s (NASDAQ:EA) P/E Ratio Signal A Buying Opportunity?
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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Electronic Arts Inc.'s (NASDAQ:EA) P/E ratio and reflect on what it tells us about the company's share price. What is Electronic Arts's P/E ratio? Well, based on the last twelve months it is 28.94. That corresponds to an earnings yield of approximately 3.5%.
See our latest analysis for Electronic Arts
How Do You Calculate Electronic Arts's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Electronic Arts:
P/E of 28.94 = $97.32 ÷ $3.36 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Electronic Arts maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 165%. And over the longer term (3 years) earnings per share have decreased 3.4% annually. So we might expect a relatively low P/E.
Does Electronic Arts Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below Electronic Arts has a P/E ratio that is fairly close for the average for the entertainment industry, which is 29.2.
Its P/E ratio suggests that Electronic Arts shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, 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
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting Electronic Arts's P/E?
With net cash of US$4.5b, Electronic Arts has a very strong balance sheet, which may be important for its business. Having said that, at 15% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Electronic Arts's P/E Ratio
Electronic Arts has a P/E of 28.9. That's higher than the average in the US market, which is 17.8. Falling earnings per share is probably keeping traditional value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
Investors have an opportunity when market expectations about a stock are wrong. 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.
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.
