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Should We Worry About Verisk Analytics, Inc.'s (NASDAQ:VRSK) P/E Ratio?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Verisk Analytics, Inc.'s (NASDAQ:VRSK) P/E ratio could help you assess the value on offer. What is Verisk Analytics's P/E ratio? Well, based on the last twelve months it is 41.59. That is equivalent to an earnings yield of about 2.4%.

Check out our latest analysis for Verisk Analytics

How Do I Calculate Verisk Analytics's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Verisk Analytics:

P/E of 41.59 = $151.77 ÷ $3.65 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.

Does Verisk Analytics Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below, Verisk Analytics has a higher P/E than the average company (22.9) in the professional services industry.

NasdaqGS:VRSK Price Estimation Relative to Market, July 17th 2019
NasdaqGS:VRSK Price Estimation Relative to Market, July 17th 2019

Its relatively high P/E ratio indicates that Verisk Analytics shareholders think it will perform better than other companies in its industry classification. 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.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Verisk Analytics increased earnings per share by 3.8% last year. And earnings per share have improved by 12% annually, over the last five years.

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.

So What Does Verisk Analytics's Balance Sheet Tell Us?

Net debt totals just 9.8% of Verisk Analytics's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Verisk Analytics's P/E Ratio

Verisk Analytics's P/E is 41.6 which is above average (18) in its market. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement.

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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Verisk Analytics. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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.