Here’s What Euronet Worldwide, Inc.’s (NASDAQ:EEFT) P/E Is Telling Us
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 Euronet Worldwide, Inc.’s (NASDAQ:EEFT) P/E ratio to inform your assessment of the investment opportunity. Euronet Worldwide has a price to earnings ratio of 38.96, based on the last twelve months. That corresponds to an earnings yield of approximately 2.6%.
See our latest analysis for Euronet Worldwide
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Euronet Worldwide:
P/E of 38.96 = $112.88 ÷ $2.9 (Based on the trailing twelve months to September 2018.)
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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Euronet Worldwide shrunk earnings per share by 27% over the last year. But over the longer term (5 years) earnings per share have increased by 16%.
How Does Euronet Worldwide’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Euronet Worldwide has a higher P/E than the average (25.5) P/E for companies in the it industry.
Its relatively high P/E ratio indicates that Euronet Worldwide shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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.
Is Debt Impacting Euronet Worldwide’s P/E?
The extra options and safety that comes with Euronet Worldwide’s US$241m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Euronet Worldwide’s P/E Ratio
Euronet Worldwide trades on a P/E ratio of 39, which is above the US market average of 17.2. The recent drop in earnings per share would make some investors cautious, 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!
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Euronet Worldwide. 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).
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 editorial-team@simplywallst.com.
