Should You Be Tempted To Sell Perficient, Inc. (NASDAQ:PRFT) Because Of Its P/E Ratio?

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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use Perficient, Inc.’s (NASDAQ:PRFT) P/E ratio to inform your assessment of the investment opportunity. What is Perficient’s P/E ratio? Well, based on the last twelve months it is 39.33. That is equivalent to an earnings yield of about 2.5%.

View our latest analysis for Perficient

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 Perficient:

P/E of 39.33 = $32.69 ÷ $0.83 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It’s nice to see that Perficient grew EPS by a stonking 31% in the last year. And its annual EPS growth rate over 5 years is 4.4%. With that performance, I would expect it to have an above average P/E ratio.

How Does Perficient’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, Perficient has a higher P/E than the average company (34.9) in the it industry.

NasdaqGS:PRFT Price Estimation Relative to Market, June 17th 2019
NasdaqGS:PRFT Price Estimation Relative to Market, June 17th 2019

That means that the market expects Perficient will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Perficient’s Balance Sheet Tell Us?

Perficient has net debt worth just 8.7% of its market capitalization. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On Perficient’s P/E Ratio

Perficient has a P/E of 39.3. That’s higher than the average in the US market, which is 17.7. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Perficient may not be the best stock to buy. So take a peek at this free list 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.