I am writing today to help inform people who are new to the stock market and want to begin learning the link between FirstCash Inc (NYSE:FCFS)’s fundamentals and stock market performance.
FirstCash Inc (NYSE:FCFS) trades with a trailing P/E of 28.1x, which is higher than the industry average of 14.6x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for FirstCash
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for FCFS
Price-Earnings Ratio = Price per share ÷ Earnings per share
FCFS Price-Earnings Ratio = $90.65 ÷ $3.228 = 28.1x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to FCFS, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. FCFS’s P/E of 28.1x is higher than its industry peers (14.6x), which implies that each dollar of FCFS’s earnings is being overvalued by investors. As such, our analysis shows that FCFS represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your FCFS shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to FCFS, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with FCFS, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing FCFS to are fairly valued by the market. If this does not hold true, FCFS’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to FCFS. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for FCFS’s future growth? Take a look at our free research report of analyst consensus for FCFS’s outlook.
- Past Track Record: Has FCFS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of FCFS’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass 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.