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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios).
We’ll look at Casa Systems, Inc.’s (NASDAQ:CASA) P/E ratio and reflect on what it tells us about the company’s share price.
Casa Systems has a P/E ratio of 11.84, based on the last twelve months.
That corresponds to an earnings yield of approximately 8.4%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Casa Systems:
P/E of 11.84 = $10.35 ÷ $0.87
(Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings 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.
Earnings growth means that in the future the ‘E’ will be higher.
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.
Casa Systems increased earnings per share by a whopping 161% last year.
And earnings per share have improved by 1.8% annually, over the last five years.
With that performance, I would expect it to have an above average P/E ratio.
How Does Casa Systems’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company.
If you look at the image below, you can see Casa Systems has a lower P/E than the average (27.7) in the communications industry classification.
Its relatively low P/E ratio indicates that Casa Systems shareholders think it will struggle to do as well as other companies in its industry classification.
Since the market seems unimpressed with Casa Systems, 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
Don’t forget that the P/E ratio considers market capitalization.
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.
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 Casa Systems’s P/E?
Casa Systems’s net debt is 1.7% of its market cap.
The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Casa Systems’s P/E Ratio
Casa Systems has a P/E of 11.8. That’s below the average in the US market, which is 17.5.
The company hasn’t stretched its balance sheet, and earnings growth was good last year.
If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors should be looking to buy stocks that the market is wrong about.
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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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 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.
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