The Price-to-Earnings (PE) ratio is widely used to value profitable companies because it ties a company’s current share price to its bottom-line performance. For businesses like Equifax that consistently deliver earnings, the PE ratio helps investors gauge whether the stock is cheap or expensive relative to the profits it is generating.

It is important to note that a “normal” or “fair” PE ratio is shaped by more than just today’s profits. Higher growth expectations or lower risk can justify a higher PE, since investors are willing to pay up for future earnings potential. Similarly, companies facing uncertainty or with slower growth prospects usually trade at a lower PE ratio.

As of now, Equifax trades on a PE ratio of 38.6x. This is notably above the Professional Services industry average of 24.6x and also higher than the peer group average of 34.6x. To add nuance, Simply Wall St calculates a proprietary Fair Ratio for each stock. In this case, it is 32.2x. The Fair Ratio is designed to reflect a more comprehensive view than a simple peer or industry comparison by factoring in Equifax’s growth outlook, risk profile, profit margins, industry membership, and market capitalization.

Because the Fair Ratio accounts for specific qualities of the company rather than just averaging across the sector, it provides a clearer picture of what a reasonable valuation should be. Since Equifax’s current PE of 38.6x is significantly above its Fair Ratio of 32.2x, the stock appears to be overvalued based on this multiple.

Result: OVERVALUED

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Earlier, we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is your personal story or perspective about a company, connecting what you believe about Equifax’s future, such as revenue, profit margins, or its competitive edge, to a tailored financial forecast and resulting in your own estimate of fair value.

Narratives help make sense of all the numbers by linking what is happening in the real world to your investment decisions, giving context to metrics like PE ratios. On Simply Wall St’s Community page, millions of investors use Narratives as an easy, interactive tool to express their assumptions and see how changes in a company’s story affect fair value in real time.

Importantly, Narratives are dynamic, as they update automatically when news breaks or earnings are announced, so your assumptions and analysis stay relevant. Suppose you believe Equifax will overcome new competition and regulatory shifts, maintaining strong margin growth and capturing new markets: your Narrative could point to a fair value as high as $300 per share. On the other hand, if you expect margin pressures and slowed revenue, you might see fair value closer to $240. Narratives empower you to compare your own fair value to the current share price, helping you decide when to buy or sell with confidence.

Do you think there’s more to the story for Equifax? Head over to our Community to see what others are saying!

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.

Companies discussed in this article include EFX.

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