How Does Phibro Animal Health's (NASDAQ:PAHC) P/E Compare To Its Industry, After Its Big Share Price Gain?

Those holding Phibro Animal Health (NASDAQ:PAHC) shares must be pleased that the share price has rebounded 35% in the last thirty days. But unfortunately, the stock is still down by 6.5% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 28% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Phibro Animal Health

How Does Phibro Animal Health's P/E Ratio Compare To Its Peers?

Phibro Animal Health's P/E of 25.64 indicates some degree of optimism towards the stock. The image below shows that Phibro Animal Health has a higher P/E than the average (22.6) P/E for companies in the pharmaceuticals industry.

Phibro Animal Health's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Phibro Animal Health saw earnings per share decrease by 48% last year. But over the longer term (5 years) earnings per share have increased by 9.4%. And over the longer term (3 years) earnings per share have decreased 15% annually. This could justify a low P/E.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Phibro Animal Health's Balance Sheet

Phibro Animal Health's net debt equates to 31% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Phibro Animal Health's P/E Ratio

Phibro Animal Health has a P/E of 25.6. That's higher than the average in its market, which is 13.6. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What we know for sure is that investors have become much more excited about Phibro Animal Health recently, since they have pushed its P/E ratio from 19.0 to 25.6 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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. Thank you for reading.