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 Jack Henry & Associates, Inc.'s (NASDAQ:JKHY) P/E ratio to inform your assessment of the investment opportunity. Jack Henry & Associates has a price to earnings ratio of 41.69, based on the last twelve months. That corresponds to an earnings yield of approximately 2.4%.
How Do I Calculate Jack Henry & Associates's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Jack Henry & Associates:
P/E of 41.69 = $150.15 ÷ $3.60 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Jack Henry & Associates 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 Jack Henry & Associates has a higher P/E than the average (30.8) P/E for companies in the it industry.
That means that the market expects Jack Henry & Associates will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Jack Henry & Associates's earnings per share fell by 27% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 9.8%.
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. 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.
Is Debt Impacting Jack Henry & Associates's P/E?
Jack Henry & Associates has net cash of US$97m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Jack Henry & Associates's P/E Ratio
Jack Henry & Associates's P/E is 41.7 which is above average (18.1) in its market. Falling earnings per share is probably keeping traditional value investors away, 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!
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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 Jack Henry & Associates. 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).
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.
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. Thank you for reading.