Here’s What TransUnion’s (NYSE:TRU) P/E Is Telling Us
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at TransUnion’s (NYSE:TRU) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, TransUnion’s P/E ratio is 28.73. That corresponds to an earnings yield of approximately 3.5%.
Check out our latest analysis for TransUnion
How Do I Calculate TransUnion’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for TransUnion:
P/E of 28.73 = $65.75 ÷ $2.29 (Based on the trailing twelve months to September 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that TransUnion grew EPS by a stonking 70% in the last year. And earnings per share have improved by 76% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does TransUnion’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, TransUnion has a higher P/E than the average company (22.5) in the professional services industry.
Its relatively high P/E ratio indicates that TransUnion shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
TransUnion’s Balance Sheet
TransUnion has net debt worth 33% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On TransUnion’s P/E Ratio
TransUnion’s P/E is 28.7 which is above average (18.4) in the US market. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. So it does not seem strange that the P/E is above average.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: TransUnion 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
