F5, Inc. (NASDAQ:FFIV) price-to-earnings (or “P/E”) ratio of 20.6x might make it look like a bargain right now, compared to the market in the United States, where about half of the companies have P/E ratios below 17x, and even P/E ratios below 10x are quite common. However, it’s not wise to simply take the P/E ratio at face value, as there might be an explanation as to why it’s so high.
With earnings growth in positive territory compared to the declining earnings of most other companies, F5 has done quite well recently. It seems that many expect the company to continue to defy general market adversities, which has increased investors’ willingness to pay more for the stock. You really should hope so, otherwise you’re paying a pretty high price for no particular reason.
Check out our latest analysis for F5
Would you like to know how analysts see the future of F5 compared to the industry? In this case, our free Report is a good starting point.
What do growth metrics tell us about the high P/E ratio?
F5’s P/E ratio would be typical of a company expected to deliver solid growth and, importantly, outperform the market.
Looking back, the last year has seen an exceptional 70% increase in earnings for the company. The strong recent performance means that the company has also grown earnings per share by a total of 94% over the last three years. So it’s fair to say that recent earnings growth has been outstanding for the company.
As for the outlook, the company is expected to grow at a rate of 12% per year over the next three years, as estimated by analysts covering the company. The rest of the market is expected to grow at a rate of 10% per year, which is not much different.
With this in mind, it is curious that F5’s P/E ratio is higher than most other companies. It seems that many investors in the company are more optimistic than analysts indicate and are not ready to sell their shares at this time. These shareholders may have to prepare for disappointment if the P/E ratio falls to a level more in line with the growth prospects.
The last word
It’s not a good idea to use the price-to-earnings ratio alone to decide whether to sell your stock, but it can be a useful guide to the company’s future prospects.
We have noted that F5 is currently trading at a higher than expected P/E ratio as its forecast growth is only in line with the overall market. At the moment, we are unhappy with the relatively high share price as forecast future earnings are unlikely to sustain such positive sentiment for long. This puts shareholders’ investments at risk and potential investors risk paying an unnecessary premium.
There are many potential risks in a company’s balance sheet. You can identify many of the main risks using our free Balance sheet analysis for F5 with six simple checks.
If you uncertain about the strength of F5’s businesswhy not explore our interactive stock list with solid business fundamentals for some other companies you may have missed.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
