Yahoo Finance How Does Synchrony Financial's (NYSE:SYF) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Synchrony Financial (NYSE:SYF) share price has dived 33% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 33% in that time.
All else being equal, a share price drop should make a stock more 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for Synchrony Financial
Does Synchrony Financial Have A Relatively High Or Low P/E For Its Industry?
Synchrony Financial's P/E of 4.02 indicates relatively low sentiment towards the stock. The image below shows that Synchrony Financial has a lower P/E than the average (6.2) P/E for companies in the consumer finance industry.
Its relatively low P/E ratio indicates that Synchrony Financial shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Synchrony Financial, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Synchrony Financial increased earnings per share by a whopping 49% last year. And its annual EPS growth rate over 5 years is 15%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
So What Does Synchrony Financial's Balance Sheet Tell Us?
Synchrony Financial has net debt worth 58% of its market capitalization. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Synchrony Financial's P/E Ratio
Synchrony Financial has a P/E of 4.0. That's below the average in the US market, which is 13.3. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given Synchrony Financial's P/E ratio has declined from 6.0 to 4.0 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
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: Synchrony Financial 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.
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