Ebix (NASDAQ:EBIX) shares have had a really impressive month, gaining 30%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 42% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
How Does Ebix’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 15.29 that sentiment around Ebix isn’t particularly high. The image below shows that Ebix has a lower P/E than the average (47.5) P/E for companies in the software industry.
Its relatively low P/E ratio indicates that Ebix shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You 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. Earnings growth means that in the future the ‘E’ will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Ebix saw earnings per share decrease by 11% last year. But EPS is up 15% over the last 5 years.
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. Thus, the metric does not reflect cash or debt held by the company. 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.
So What Does Ebix’s Balance Sheet Tell Us?
Net debt is 49% of Ebix’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Ebix’s P/E Ratio
Ebix trades on a P/E ratio of 15.3, which is below the US market average of 18.2. With only modest debt, it’s likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What we know for sure is that investors have become more excited about Ebix recently, since they have pushed its P/E ratio from 11.7 to 15.3 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is ‘blood in the streets’, then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Ebix. 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).
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.