Yelp Inc (NYSE:YELP) Passes Key Peter Lynch Investment Screen

Investment methods that combine growth possibility with fair prices have long drawn market players looking for lasting results. The Peter Lynch system, described in his book One Up on Wall Street, stresses finding companies with good but controlled expansion, sound financial condition, and appealing prices. This system sidesteps speculative market predictions, concentrating instead on basic measures to create a varied, extended-timeframe collection. One firm that recently appeared through a filter using Lynch’s rules is Yelp Inc (NYSE:YELP).

Growth and Lasting Quality

A central idea of the Lynch system is to aim for companies with profit expansion that is solid and maintainable, steering clear of businesses whose growth is too quick to continue. This is calculated by the earnings per share (EPS) expansion over a five-year span.

• Yelp’s five-year EPS expansion is about 24.97%, well over the 15% lowest limit Lynch advises.
• This number also stays under the 30% upper limit Lynch mentions, pointing to expansion that is good but not excessively heated.

This steady expansion in earnings implies Yelp has established a workable business plan without using the sudden, often temporary, growth that can cause instability.

Price Evaluation

Lynch was known for using the PEG ratio (Price/Earnings to Growth) to locate stocks that are fairly valued compared to their expansion path. A PEG ratio at or under 1.0 indicates that a buyer may not be paying too much for the firm's growth outlook.

• Yelp’s PEG ratio, calculated from its previous five-year expansion, is 0.50, which is much lower than the goal of 1.0.

This low PEG ratio is a key part of the "fair price" element of the GARP method. It shows that even with its good historical profit expansion, Yelp's stock is valued at a level Lynch would probably see as appealing.

Financial Condition and Earnings Strength

The Lynch filter applies firm rules for financial soundness to make sure companies can handle economic slowdowns. Important condition measures include a low debt-to-equity ratio and a good current ratio, while earnings strength is measured by return on equity (ROE).

• Debt Handling: Yelp has a debt-to-equity ratio of 0.0, meaning it functions with no interest-bearing debt. This is much better than Lynch's desired level under 0.6 and even his tighter goal of 0.25, putting the firm in a very strong financial state.
• Cash Availability: With a current ratio of 3.27, Yelp possesses over three times the current assets required to pay its near-term debts. This shows sufficient cash availability to support activities and handle unexpected issues.
• Earnings Effectiveness: The firm’s ROE of 19.98% is well above the 15% minimum, indicating it is very good at creating earnings from owner investment.

These measures together describe a company with a very strong financial base and effective activities, matching well with Lynch’s focus on financial resilience.

Basic Report Overview

A thorough basic examination of Yelp gives it a total score of 7 out of 10. The report notes several positive points that align with the Lynch rules. The company gets an 8 for earnings strength, pushed by high returns on assets, equity, and invested money, along with good and rising earnings margins. Its condition score is a higher 9, backed by the total lack of debt and strong cash ratios. From a price viewpoint, Yelp receives an 8, with its price-to-earnings and price-to-free-cash-flow ratios seen as low compared to both its industry group and the wider S&P 500.

Closing Thoughts

For buyers following the ideas of Peter Lynch, Yelp Inc offers a strong argument. It shows a record of maintainable profit expansion, trades at a good value when expansion is considered through its low PEG ratio, and keeps a clean financial base with high earnings strength. While the wider market displays a positive near-term direction, the Lynch thinking promotes seeing past such changes to concentrate on a company's basic extended-timeframe narrative. Yelp’s description suggests it has the qualities of a business that could be a good part of a varied, extended-timeframe collection.

For buyers wanting to do their own study, more companies that fit the Peter Lynch investment rules can be located using our Peter Lynch Stock Screener.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.