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Why Yangaroo Inc.’s (CVE:YOO) High P/E Ratio Isn’t Necessarily A Bad Thing

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Yangaroo Inc.’s (CVE:YOO) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Yangaroo’s P/E ratio is 33.28. In other words, at today’s prices, investors are paying CA$33.28 for every CA$1 in prior year profit.

Check out our latest analysis for Yangaroo

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

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Or for Yangaroo:

P/E of 33.28 = CA$0.13 ÷ CA$0.0039 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. 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. When earnings grow, the ‘E’ increases, over time. 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.

It’s nice to see that Yangaroo grew EPS by a stonking 86% in the last year. And earnings per share have improved by 56% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

How Does Yangaroo’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Yangaroo has a higher P/E than the average company (24.7) in the interactive media and services industry.

TSXV:YOO PE PEG Gauge January 2nd 19
TSXV:YOO PE PEG Gauge January 2nd 19

That means that the market expects Yangaroo will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

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.

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).

Yangaroo’s Balance Sheet

Yangaroo has net cash of CA$716k. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Yangaroo’s P/E Ratio

Yangaroo has a P/E of 33.3. That’s higher than the average in the CA market, which is 13.1. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Yangaroo 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.