Yahoo Finance What Is PagSeguro Digital's (NYSE:PAGS) P/E Ratio After Its Share Price Rocketed?
Those holding PagSeguro Digital (NYSE:PAGS) shares must be pleased that the share price has rebounded 35% in the last thirty days. But unfortunately, the stock is still down by 26% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 14% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See 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 of 36.76 indicates some degree of optimism towards the stock. The image below shows that PagSeguro Digital has a higher P/E than the average (25.6) P/E for companies in the it industry.
PagSeguro Digital's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
It's nice to see that PagSeguro Digital grew EPS by a stonking 45% in the last year. And it has bolstered its earnings per share by 111% per year over the last five years. 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
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
PagSeguro Digital's Balance Sheet
Since PagSeguro Digital holds net cash of R$2.8b, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On PagSeguro Digital's P/E Ratio
PagSeguro Digital has a P/E of 36.8. That's higher than the average in its market, which is 14.8. Its net cash position is the cherry on top of its superb 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 27.3 to 36.8 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.