This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios).
We’ll show how you can use Raymond James Financial Inc’s (NYSE:RJF) P/E ratio to inform your assessment of the investment opportunity.
Raymond James Financial has a P/E ratio of 13.54, based on the last twelve months.
That is equivalent to an earnings yield of about 7.4%.
How Do I Calculate Raymond James Financial’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Raymond James Financial:
P/E of 13.54 = $79.73 ÷ $5.89
(Based on the year to September 2018.)
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
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.
So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Raymond James Financial grew EPS by a whopping 33% in the last year.
And it has bolstered its earnings per share by 13% per year over the last five years.
With that performance, I would expect it to have an above average P/E ratio.
How Does Raymond James Financial’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company.
If you look at the image below, you can see Raymond James Financial has a lower P/E than the average (20.7) in the capital markets industry classification.
Its relatively low P/E ratio indicates that Raymond James Financial shareholders think it will struggle to do as well as other companies in its industry classification.
Many investors like to buy stocks when the market is pessimistic about their prospects.
It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company.
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.
Raymond James Financial’s Balance Sheet
Since Raymond James Financial holds net cash of US$4.1b, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Raymond James Financial’s P/E Ratio
Raymond James Financial’s P/E is 13.5 which is below average (18) in the US market.
The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see.
One might conclude that the market is a bit pessimistic, given the low P/E ratio.
Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.
Investors have an opportunity when market expectations about a stock are wrong.
If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself.
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: Raymond James Financial 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.
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