Yahoo Finance Is Integrated Research Limited's (ASX:IRI) P/E Ratio Really That Good?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Integrated Research Limited's (ASX:IRI) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Integrated Research has a P/E ratio of 21.51. In other words, at today's prices, investors are paying A$21.51 for every A$1 in prior year profit.
Check out our latest analysis for Integrated Research
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Integrated Research:
P/E of 21.51 = A$2.71 ÷ A$0.13 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Integrated Research saw earnings per share improve by -7.3% last year. And its annual EPS growth rate over 5 years is 14%.
Does Integrated Research Have A Relatively High Or Low P/E For Its Industry?
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 Integrated Research has a lower P/E than the average (35.6) in the software industry classification.
Its relatively low P/E ratio indicates that Integrated Research shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Integrated Research, 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.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Integrated Research's Balance Sheet Tell Us?
The extra options and safety that comes with Integrated Research's AU$9.6m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Integrated Research's P/E Ratio
Integrated Research has a P/E of 21.5. That's higher than the average in the AU market, which is 16.1. EPS was up modestly better over the last twelve months. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will.
Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Integrated Research. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
