Yahoo Finance Does E*TRADE Financial Corporation's (NASDAQ:ETFC) P/E Ratio Signal A Buying Opportunity?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at E*TRADE Financial Corporation's (NASDAQ:ETFC) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, E*TRADE Financial has a P/E ratio of 8.93. That means that at current prices, buyers pay $8.93 for every $1 in trailing yearly profits.
See our latest analysis for E*TRADE Financial
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 E*TRADE Financial:
P/E of 8.93 = $36.40 ÷ $4.08 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Does E*TRADE Financial's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that E*TRADE Financial has a lower P/E than the average (35.5) P/E for companies in the capital markets industry.
This suggests that market participants think E*TRADE Financial will underperform other companies in its industry. Since the market seems unimpressed with E*TRADE Financial, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Notably, E*TRADE Financial grew EPS by a whopping 46% in the last year. And it has bolstered its earnings per share by 34% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 investing in growth. That means taking on debt (or spending its cash).
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 E*TRADE Financial's Balance Sheet Tell Us?
E*TRADE Financial's net debt is 10% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On E*TRADE Financial's P/E Ratio
E*TRADE Financial's P/E is 8.9 which is below average (17.6) in the US market. 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 have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: E*TRADE 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).
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.
