U.S. Markets open in 1 hr 43 mins

Here's What CACI International Inc's (NYSE:CACI) P/E Ratio Is Telling Us

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at CACI International Inc's (NYSE:CACI) P/E ratio and reflect on what it tells us about the company's share price. CACI International has a P/E ratio of 19.59, based on the last twelve months. In other words, at today's prices, investors are paying $19.59 for every $1 in prior year profit.

See our latest analysis for CACI International

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for CACI International:

P/E of 19.59 = $211.37 ÷ $10.79 (Based on the year to March 2019.)

Is A High P/E 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.

Does CACI International Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that CACI International has a lower P/E than the average (31.3) P/E for companies in the it industry.

NYSE:CACI Price Estimation Relative to Market, August 5th 2019

Its relatively low P/E ratio indicates that CACI International shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

CACI International saw earnings per share decrease by 9.8% last year. But over the longer term (5 years) earnings per share have increased by 13%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 CACI International's Debt Impact Its P/E Ratio?

CACI International's net debt equates to 32% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On CACI International's P/E Ratio

CACI International has a P/E of 19.6. That's higher than the average in its market, which is 17.5. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than CACI International. 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.