When Should You Buy EML Payments Limited (ASX:EML)?

While EML Payments Limited (ASX:EML) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price movement on the ASX over the last few months, increasing to AU$3.25 at one point, and dropping to the lows of AU$1.57. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether EML Payments' current trading price of AU$1.57 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at EML Payments’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

View our latest analysis for EML Payments

What is EML Payments worth?

EML Payments is currently expensive based on my price multiple model, where I look at the company's price-to-earnings ratio in comparison to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that EML Payments’s ratio of 55.71x is above its peer average of 31.32x, which suggests the stock is trading at a higher price compared to the IT industry. If you like the stock, you may want to keep an eye out for a potential price decline in the future. Given that EML Payments’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

Can we expect growth from EML Payments?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. EML Payments' earnings over the next few years are expected to double, indicating a very optimistic future ahead. This should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in EML’s positive outlook, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe EML should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on EML for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for EML, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing EML Payments at this point in time. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of EML Payments.

If you are no longer interested in EML Payments, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.