This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how EPAM Systems, Inc.’s (NYSE:EPAM) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, EPAM Systems has a P/E ratio of 41.93. That corresponds to an earnings yield of approximately 2.4%.
How Do You Calculate EPAM Systems’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for EPAM Systems:
P/E of 41.93 = $189.61 ÷ $4.52 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Does EPAM Systems’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, EPAM Systems has a higher P/E than the average company (32) in the it industry.
EPAM Systems’s P/E tells us that market participants think the company will perform better than its industry peers, going forward.
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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, EPAM Systems grew EPS like Taylor Swift grew her fan base back in 2010; the 90% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 26% per year. With that kind of growth rate we would generally expect a high P/E ratio.
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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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?
The extra options and safety that comes with EPAM Systems’s US$752m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On EPAM Systems’s P/E Ratio
EPAM Systems has a P/E of 41.9. That’s higher than the average in its market, which is 17.3. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect EPAM Systems to have a high P/E ratio.
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.
You might be able to find a better buy than EPAM Systems. 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).
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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.