Falling -5.5% today, shares of Arm are giving us reason to question their average rating of buy. Did analysts get things wrong about this stock? Let's dive into the numbers to see whether ARM is overvalued at today's price of $124.87 per share.
Arm has a P/E ratio of 204.7 based on its 12 month trailing earnings per share of $0.61. Considering its future earnings estimates of $2.06 per share, the stock's forward P/E ratio is 60.6. In comparison, the average P/E ratio of the Technology sector is 30.01 and the average P/E ratio of the S&P 500 is 29.3.
We can also compare the ratio of Arm's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. ARM has a P/B ratio of 21.83, with any figure close to or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Arm's quick ratio is 4.247. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
The last factor we will review in our value analysis of Arm is its levered free cash flow, which is negative at $-319000000. The levered free cash flow represents the sum of all of the company's inflows and outflows of capital in the last quarter. A negative value means that Arm has no cash left over to re-invest in the business or to pay equity investors in the form of a dividend.
At Market Inference, we will keep monitoring Arm to see if the analysts were right to recommend the stock despite its valuation issues. We recognize that numbers don't always tell the whole story, and that qualitative factors often set high performing investments apart from the rest.
