Yahoo Finance How Does WiseTech Global's (ASX:WTC) P/E Compare To Its Industry, After Its Big Share Price Gain?
Those holding WiseTech Global (ASX:WTC) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 37% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 26% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
View our latest analysis for WiseTech Global
How Does WiseTech Global's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 54.47 that there is some investor optimism about WiseTech Global. The image below shows that WiseTech Global has a higher P/E than the average (34.0) P/E for companies in the software industry.
WiseTech Global's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.
WiseTech Global's 78% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The sweetener is that the annual five year growth rate of 47% is also impressive. So I'd be surprised if the P/E ratio was not above average.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
WiseTech Global's Balance Sheet
The extra options and safety that comes with WiseTech Global's AU$233m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On WiseTech Global's P/E Ratio
With a P/E ratio of 54.5, WiseTech Global is expected to grow earnings very strongly in the years to come. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect WiseTech Global to have a high P/E ratio. What we know for sure is that investors have become much more excited about WiseTech Global recently, since they have pushed its P/E ratio from 40.9 to 54.5 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.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: WiseTech Global 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).
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.
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. Thank you for reading.
