Is Fidelity National Information Services, Inc.'s (NYSE:FIS) High P/E Ratio A Problem For Investors?

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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Fidelity National Information Services, Inc.'s (NYSE:FIS) P/E ratio and reflect on what it tells us about the company's share price. Fidelity National Information Services has a P/E ratio of 51.36, based on the last twelve months. That corresponds to an earnings yield of approximately 1.9%.

View our latest analysis for Fidelity National Information Services

How Do You Calculate Fidelity National Information Services's P/E Ratio?

The formula for price to earnings is:

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

Or for Fidelity National Information Services:

P/E of 51.36 = $127.82 ÷ $2.49 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Fidelity National Information Services's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Fidelity National Information Services has a higher P/E than the average company (36.7) in the it industry.

NYSE:FIS Price Estimation Relative to Market, July 12th 2019

That means that the market expects Fidelity National Information Services will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

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. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Fidelity National Information Services shrunk earnings per share by 37% over the last year. But over the longer term (5 years) earnings per share have increased by 7.6%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.

How Does Fidelity National Information Services's Debt Impact Its P/E Ratio?

Fidelity National Information Services has net debt worth 21% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Fidelity National Information Services's P/E Ratio

Fidelity National Information Services trades on a P/E ratio of 51.4, which is above its market average of 17.9. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Fidelity National Information Services may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.