Despite Its High P/E Ratio, Is Freelance.com SA (EPA:ALFRE) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Freelance.com SA's (EPA:ALFRE) P/E ratio and reflect on what it tells us about the company's share price. What is Freelance.com's P/E ratio? Well, based on the last twelve months it is 23.57. In other words, at today's prices, investors are paying €23.57 for every €1 in prior year profit.

View our latest analysis for Freelance.com

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Freelance.com:

P/E of 23.57 = €1.88 ÷ €0.080 (Based on the trailing twelve months to June 2018.)

Is A High Price-to-Earnings 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. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, Freelance.com grew EPS like Taylor Swift grew her fan base back in 2010; the 76% gain was both fast and well deserved.

Does Freelance.com Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Freelance.com has a higher P/E than the average (21) P/E for companies in the professional services industry.

Its relatively high P/E ratio indicates that Freelance.com 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. 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).

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.

How Does Freelance.com's Debt Impact Its P/E Ratio?

Since Freelance.com holds net cash of €3.5m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Freelance.com's P/E Ratio

Freelance.com has a P/E of 23.6. That's higher than the average in the FR market, which is 16.1. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

Investors have an opportunity when market expectations about a stock are wrong. 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 freereport on the analyst consensus forecasts could help you make a master move on this stock.

But note: Freelance.com may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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 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. Thank you for reading.