What Cass Information Systems, Inc.’s (NASDAQ:CASS) P/E Is Not Telling You

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When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 16x, you may consider Cass Information Systems, Inc. (NASDAQ:CASS) as a stock to potentially avoid with its 18.9x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Cass Information Systems has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Cass Information Systems

pe-multiple-vs-industry
NasdaqGS:CASS Price to Earnings Ratio vs Industry April 20th 2024

Keen to find out how analysts think Cass Information Systems’ future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

The only time you’d be truly comfortable seeing a P/E as high as Cass Information Systems’ is when the company’s growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company’s bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 28% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 13% as estimated by the one analyst watching the company. That’s shaping up to be similar to the 11% growth forecast for the broader market.

With this information, we find it interesting that Cass Information Systems is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren’t willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Cass Information Systems’ P/E

Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We’ve established that Cass Information Systems currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.

The company’s balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Cass Information Systems with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Valuation is complex, but we’re helping make it simple.

Find out whether Cass Information Systems is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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