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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Fidelity National Financial, Inc.'s (NYSE:FNF) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Fidelity National Financial has a P/E ratio of 14.28. In other words, at today's prices, investors are paying $14.28 for every $1 in prior year profit.
How Do I Calculate Fidelity National Financial's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Fidelity National Financial:
P/E of 14.28 = $38.55 ÷ $2.7 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's nice to see that Fidelity National Financial grew EPS by a stonking 32% in the last year. And its annual EPS growth rate over 5 years is 20%. So we'd generally expect it to have a relatively high P/E ratio.
How Does Fidelity National Financial's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Fidelity National Financial has a lower P/E than the average (17.2) in the insurance industry classification.
Its relatively low P/E ratio indicates that Fidelity National Financial shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Fidelity National Financial, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Fidelity National Financial's Debt Impact Its P/E Ratio?
Fidelity National Financial's net debt is 2.1% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Fidelity National Financial's P/E Ratio
Fidelity National Financial trades on a P/E ratio of 14.3, which is below the US market average of 17. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Fidelity National Financial. 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).
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 firstname.lastname@example.org. 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.