In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use TransAct Technologies Incorporated’s (NASDAQ:TACT) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, TransAct Technologies’s P/E ratio is 17.63. That means that at current prices, buyers pay $17.63 for every $1 in trailing yearly profits.
Check out our latest analysis for TransAct Technologies
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for TransAct Technologies:
P/E of 17.63 = $9.58 ÷ $0.54 (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 $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
TransAct Technologies saw earnings per share decrease by 19% last year. But over the longer term (5 years) earnings per share have increased by 13%.
How Does TransAct Technologies’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that TransAct Technologies has a higher P/E than the average (15.2) P/E for companies in the tech industry.
That means that the market expects TransAct Technologies 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. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.