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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 MarketAxess Holdings Inc.'s (NASDAQ:MKTX) P/E ratio could help you assess the value on offer. MarketAxess Holdings has a price to earnings ratio of 69.61, based on the last twelve months. That is equivalent to an earnings yield of about 1.4%.
View our latest analysis for MarketAxess Holdings
How Do You Calculate MarketAxess Holdings's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for MarketAxess Holdings:
P/E of 69.61 = $333.99 ÷ $4.8 (Based on the trailing twelve months 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.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's great to see that MarketAxess Holdings grew EPS by 15% in the last year. And its annual EPS growth rate over 5 years is 20%. With that performance, you might expect an above average P/E ratio.
Does MarketAxess Holdings 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, MarketAxess Holdings has a higher P/E than the average company (35.5) in the capital markets industry.
Its relatively high P/E ratio indicates that MarketAxess Holdings 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.