Yahoo Finance Why Jefferies Financial Group Inc’s (NYSE:JEF) High P/E Ratio Isn’t Necessarily A Bad Thing
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Jefferies Financial Group Inc’s (NYSE:JEF) P/E ratio and reflect on what it tells us about the company’s share price. Jefferies Financial Group has a P/E ratio of 34.78, based on the last twelve months. That means that at current prices, buyers pay $34.78 for every $1 in trailing yearly profits.
View our latest analysis for Jefferies Financial Group
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Jefferies Financial Group:
P/E of 34.78 = $21.03 ÷ $0.60 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. 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.
Jefferies Financial Group saw earnings per share decrease by 53% last year. But EPS is up 24% over the last 3 years. And it has shrunk its earnings per share by 21% per year over the last five years. This might lead to muted expectations.
How Does Jefferies Financial Group’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Jefferies Financial Group has a P/E ratio that is roughly in line with the diversified financial industry average (32.8).
That indicates that the market expects Jefferies Financial Group will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Jefferies Financial Group’s Debt Impact Its P/E Ratio?
Jefferies Financial Group has net debt worth 36% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Jefferies Financial Group’s P/E Ratio
Jefferies Financial Group trades on a P/E ratio of 34.8, which is above the US market average of 18.4. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
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: Jefferies Financial Group 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
