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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Robert Half International Inc.'s (NYSE:RHI) P/E ratio and reflect on what it tells us about the company's share price. Robert Half International has a price to earnings ratio of 17.52, based on the last twelve months. That means that at current prices, buyers pay $17.52 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Robert Half International:
P/E of 17.52 = $63.15 ÷ $3.6 (Based on the trailing twelve months to December 2018.)
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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 Robert Half International grew EPS by a stonking 54% in the last year. And its annual EPS growth rate over 5 years is 7.7%. With that performance, I would expect it to have an above average P/E ratio.
How Does Robert Half International'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 Robert Half International has a lower P/E than the average (21.3) in the professional services industry classification.
Robert Half International's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Robert Half International's P/E?
The extra options and safety that comes with Robert Half International's US$276m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Robert Half International's P/E Ratio
Robert Half International has a P/E of 17.5. That's around the same as the average in the US market, which is 17.2. The balance sheet is healthy, and recent EPS growth impressive, but the P/E implies some caution from the market. Given analysts are expecting further growth, I am a little surprised the P/E ratio is not higher. That may be worth further research.
Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Robert Half 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 email@example.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.