Yahoo Finance Is IAC/InterActiveCorp's (NASDAQ:IAC) High P/E Ratio A Problem For Investors?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at IAC/InterActiveCorp's (NASDAQ:IAC) P/E ratio and reflect on what it tells us about the company's share price. What is IAC/InterActiveCorp's P/E ratio? Well, based on the last twelve months it is 28.65. That corresponds to an earnings yield of approximately 3.5%.
See our latest analysis for IAC/InterActiveCorp
How Do I Calculate IAC/InterActiveCorp's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for IAC/InterActiveCorp:
P/E of 28.65 = $215.36 ÷ $7.52 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $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
Earnings growth rates have a big influence on P/E ratios. 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.
In the last year, IAC/InterActiveCorp grew EPS like Taylor Swift grew her fan base back in 2010; the 97% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 17% is also impressive. So I'd be surprised if the P/E ratio was not above average.
How Does IAC/InterActiveCorp'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 IAC/InterActiveCorp has a P/E ratio that is fairly close for the average for the interactive media and services industry, which is 28.7.
That indicates that the market expects IAC/InterActiveCorp 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. I inform my view byby checking management tenure and remuneration, among other things.
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. 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).
How Does IAC/InterActiveCorp's Debt Impact Its P/E Ratio?
Net debt totals just 0.02% of IAC/InterActiveCorp's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Bottom Line On IAC/InterActiveCorp's P/E Ratio
IAC/InterActiveCorp's P/E is 28.7 which is above average (18.1) in the US market. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable.
Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than IAC/InterActiveCorp. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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. Thank you for reading.