This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Adtalem Global Education Inc.’s (NYSE:ATGE) P/E ratio and reflect on what it tells us about the company’s share price. Adtalem Global Education has a price to earnings ratio of 15.07, based on the last twelve months. In other words, at today’s prices, investors are paying $15.07 for every $1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Adtalem Global Education:
P/E of 15.07 = $46.93 ÷ $3.11 (Based on the trailing twelve months to December 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
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. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Adtalem Global Education increased earnings per share by a whopping 222% last year. And its annual EPS growth rate over 3 years is 37%. So we’d generally expect it to have a relatively high P/E ratio. In contrast, EPS has decreased by 3.6%, annually, over 5 years.
How Does Adtalem Global Education’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Adtalem Global Education has a lower P/E than the average (25.9) P/E for companies in the consumer services industry.
Adtalem Global Education’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Adtalem Global Education, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining 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 Adtalem Global Education’s Debt Impact Its P/E Ratio?
The extra options and safety that comes with Adtalem Global Education’s US$2.7m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Adtalem Global Education’s P/E Ratio
Adtalem Global Education has a P/E of 15.1. That’s below the average in the US market, which is 17.8. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Adtalem Global Education. 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 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. Thank you for reading.