Does OraSure Technologies, Inc. (NASDAQ:OSUR) Have A Good P/E Ratio?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at OraSure Technologies, Inc.'s (NASDAQ:OSUR) P/E ratio and reflect on what it tells us about the company's share price. OraSure Technologies has a P/E ratio of 34.49, based on the last twelve months. In other words, at today's prices, investors are paying $34.49 for every $1 in prior year profit.

Check out our latest analysis for OraSure Technologies

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for OraSure Technologies:

P/E of 34.49 = $11.51 ÷ $0.33 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

OraSure Technologies shrunk earnings per share by 36% over the last year. But EPS is up 49% over the last 5 years.

How Does OraSure Technologies's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that OraSure Technologies has a lower P/E than the average (45) P/E for companies in the medical equipment industry.

OraSure Technologies's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with OraSure Technologies, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

OraSure Technologies's Balance Sheet

The extra options and safety that comes with OraSure Technologies's US$157m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On OraSure Technologies's P/E Ratio

OraSure Technologies's P/E is 34.5 which is above average (17.5) in the US market. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this freevisualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: OraSure Technologies may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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. Thank you for reading.