Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at F5 Networks, Inc.'s (NASDAQ:FFIV) P/E ratio and reflect on what it tells us about the company's share price. What is F5 Networks's P/E ratio? Well, based on the last twelve months it is 17.94. That corresponds to an earnings yield of approximately 5.6%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for F5 Networks:
P/E of 17.94 = $139.10 ÷ $7.75 (Based on the year to June 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 Does F5 Networks's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see F5 Networks has a lower P/E than the average (29.6) in the communications industry classification.
F5 Networks'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 F5 Networks, 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.
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. 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.
F5 Networks's earnings per share grew by -5.1% in the last twelve months. And its annual EPS growth rate over 5 years is 15%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
So What Does F5 Networks's Balance Sheet Tell Us?
F5 Networks has net cash of US$986m. This is fairly high at 12% 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 F5 Networks's P/E Ratio
F5 Networks has a P/E of 17.9. That's around the same as the average in the US market, which is 17.8. Earnings improved over the last year. And the net cash position gives the company many options. The average P/E suggests the market isn't overly optimistic, though.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: F5 Networks may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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.