This open ports on sonicwallarticle is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at ANSYS, Inc.’s (

NASDAQ:ANSS

) P/E ratio and reflect on what it tells us about the company’s share price.

ANSYS has a price to earnings ratio of 37.76

, based on the last twelve months. That means that at current prices, buyers pay $37.76 for every $1 in trailing yearly profits.

See our latest analysis for ANSYS

How Do I Calculate ANSYS’s Price To Earnings Ratio?

The

formula for price to earnings

is:

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

Or for ANSYS:

P/E of 37.76 = $142.99 ÷ $3.79 (Based on the trailing twelve months to September 2018.)

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 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

ANSYS increased earnings per share by an impressive 17% over the last twelve months. And it has bolstered its earnings per share by 6.3% per year over the last five years. With that performance, you might expect an above average P/E ratio.

How Does ANSYS’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that ANSYS has a P/E ratio that is roughly in line with the software industry average (40.7).

NasdaqGS:ANSS PE PEG Gauge January 2nd 19

That indicates that the market expects ANSYS will perform roughly in line with other companies in its industry. So if ANSYS actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as

management tenure

, could help you form your own view on whether that is likely.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

ANSYS’s Balance Sheet

ANSYS has net cash of US$729m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On ANSYS’s P/E Ratio

ANSYS’s P/E is 37.8 which is above average (16) in the US market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this

free

visual report on analyst forecasts

could hold they key to an excellent investment decision.

You might be able to find a better buy than ANSYS. If you want a selection of possible winners, check out this

free

list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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