Does TD Ameritrade Holding Corporation's (NASDAQ:AMTD) P/E Ratio Signal A Buying Opportunity?
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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to TD Ameritrade Holding Corporation's (NASDAQ:AMTD), to help you decide if the stock is worth further research. What is TD Ameritrade Holding's P/E ratio? Well, based on the last twelve months it is 14.15. That corresponds to an earnings yield of approximately 7.1%.
Check out our latest analysis for TD Ameritrade Holding
How Do I Calculate TD Ameritrade Holding's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for TD Ameritrade Holding:
P/E of 14.15 = $50.37 ÷ $3.56 (Based on the trailing twelve months to March 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, TD Ameritrade Holding grew EPS like Taylor Swift grew her fan base back in 2010; the 93% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 21% per year. With that kind of growth rate we would generally expect a high P/E ratio.
Does TD Ameritrade Holding 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. We can see in the image below that the average P/E (37.8) for companies in the capital markets industry is higher than TD Ameritrade Holding's P/E.
TD Ameritrade Holding's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with TD Ameritrade Holding, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does TD Ameritrade Holding's Debt Impact Its P/E Ratio?
TD Ameritrade Holding has net cash of US$4.9b. This is fairly high at 18% 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 Verdict On TD Ameritrade Holding's P/E Ratio
TD Ameritrade Holding has a P/E of 14.1. That's below the average in the US market, which is 18.2. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The relatively low P/E ratio implies the market is pessimistic.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than TD Ameritrade Holding. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
