A Rising Share Price Has Us Looking Closely At EPAM Systems, Inc.'s (NYSE:EPAM) P/E Ratio

Those holding EPAM Systems (NYSE:EPAM) shares must be pleased that the share price has rebounded 34% in the last thirty days. But unfortunately, the stock is still down by 9.3% over a quarter. The full year gain of 22% is pretty reasonable, too.

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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for EPAM Systems

How Does EPAM Systems's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 45.34 that there is some investor optimism about EPAM Systems. You can see in the image below that the average P/E (29.4) for companies in the it industry is lower than EPAM Systems's P/E.

Its relatively high P/E ratio indicates that EPAM Systems shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

EPAM Systems increased earnings per share by 6.5% last year. And earnings per share have improved by 26% annually, over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

How Does EPAM Systems's Debt Impact Its P/E Ratio?

EPAM Systems has net cash of US$911m. 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 EPAM Systems's P/E Ratio

EPAM Systems trades on a P/E ratio of 45.3, which is multiples above its market average of 14.4. EPS was up modestly better over the last twelve months. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will. What we know for sure is that investors have become much more excited about EPAM Systems recently, since they have pushed its P/E ratio from 33.9 to 45.3 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 the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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