Advertisement
U.S. markets open in 1 hour 12 minutes
  • S&P Futures

    5,308.00
    -0.25 (-0.00%)
     
  • Dow Futures

    40,159.00
    +15.00 (+0.04%)
     
  • Nasdaq Futures

    18,503.00
    -0.75 (-0.00%)
     
  • Russell 2000 Futures

    2,140.10
    +1.70 (+0.08%)
     
  • Crude Oil

    82.47
    +1.12 (+1.38%)
     
  • Gold

    2,234.20
    +21.50 (+0.97%)
     
  • Silver

    24.70
    -0.05 (-0.19%)
     
  • EUR/USD

    1.0789
    -0.0041 (-0.38%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Vix

    13.01
    +0.23 (+1.80%)
     
  • dólar/libra

    1.2620
    -0.0019 (-0.15%)
     
  • USD/JPY

    151.3140
    +0.0680 (+0.04%)
     
  • Bitcoin USD

    70,397.30
    +258.18 (+0.37%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.37
    +20.39 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

What Is Radian Group's (NYSE:RDN) P/E Ratio After Its Share Price Rocketed?

Those holding Radian Group (NYSE:RDN) shares must be pleased that the share price has rebounded 44% in the last thirty days. But unfortunately, the stock is still down by 44% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 41% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

View our latest analysis for Radian Group

How Does Radian Group's P/E Ratio Compare To Its Peers?

Radian Group's P/E of 4.34 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Radian Group has a lower P/E than the average (11.3) in the mortgage industry classification.

NYSE:RDN Price Estimation Relative to Market May 4th 2020
NYSE:RDN Price Estimation Relative to Market May 4th 2020

Radian Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

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 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.

Radian Group increased earnings per share by an impressive 14% over the last twelve months. And its annual EPS growth rate over 3 years is 30%. So one might expect an above average P/E ratio. Unfortunately, earnings per share are down 14% a year, over 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).

Radian Group's Balance Sheet

Radian Group's net debt is 4.4% of its market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On Radian Group's P/E Ratio

Radian Group trades on a P/E ratio of 4.3, which is below the US market average of 14.4. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What we know for sure is that investors are becoming less uncomfortable about Radian Group's prospects, since they have pushed its P/E ratio from 3.0 to 4.3 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

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.

Of course you might be able to find a better stock than Radian Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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.

Advertisement