Those holding PagSeguro Digital (NYSE:PAGS) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 12% over a quarter. However, the annual gain of 4.1% wasn’t so impressive.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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 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.
Does PagSeguro Digital Have A Relatively High Or Low P/E For Its Industry?
PagSeguro Digital’s P/E of 39.41 indicates some degree of optimism towards the stock. As you can see below, PagSeguro Digital has a higher P/E than the average company (28.7) in the it industry.
PagSeguro Digital’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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.
It’s nice to see that PagSeguro Digital grew EPS by a stonking 45% in the last year. And it has bolstered its earnings per share by 111% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
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. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does PagSeguro Digital’s Balance Sheet Tell Us?
PagSeguro Digital has net cash of R$2.8b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On PagSeguro Digital’s P/E Ratio
PagSeguro Digital has a P/E of 39.4. That’s higher than the average in its market, which is 15.1. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect PagSeguro Digital to have a high P/E ratio. What is very clear is that the market has become significantly more optimistic about PagSeguro Digital over the last month, with the P/E ratio rising from 30.0 back then to 39.4 today. For those who prefer to invest with the flow of momentum, that might mean it’s time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than PagSeguro Digital. 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).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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