A Rising Share Price Has Us Looking Closely At PagSeguro Digital Ltd.'s (NYSE:PAGS) P/E Ratio

Those holding PagSeguro Digital (NYSE:PAGS) shares must be pleased that the share price has rebounded 34% in the last thirty days. But unfortunately, the stock is still down by 43% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 24% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for PagSeguro Digital

Does PagSeguro Digital Have A Relatively High Or Low P/E For Its Industry?

PagSeguro Digital's P/E is 25.58. You can see in the image below that the average P/E (26.6) for companies in the it industry is roughly the same as PagSeguro Digital's P/E.

Its P/E ratio suggests that PagSeguro Digital shareholders think that in the future it will perform about the same as other companies in its industry classification. So if PagSeguro Digital actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

PagSeguro Digital increased earnings per share by a whopping 45% last year. And its annual EPS growth rate over 5 years is 111%. I'd therefore be a little surprised if its P/E ratio was not relatively high.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.

Is Debt Impacting PagSeguro Digital's P/E?

PagSeguro Digital has net cash of R$2.8b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On PagSeguro Digital's P/E Ratio

PagSeguro Digital's P/E is 25.6 which is above average (13.3) in its market. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect PagSeguro Digital to have a high P/E ratio. What we know for sure is that investors have become much more excited about PagSeguro Digital recently, since they have pushed its P/E ratio from 19.1 to 25.6 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

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 free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: PagSeguro Digital 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).

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.

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. Thank you for reading.