Should You Be Tempted To Sell International Flavors & Fragrances Inc. (NYSE:IFF) Because Of Its P/E Ratio?

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use International Flavors & Fragrances Inc.’s (NYSE:IFF) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, International Flavors & Fragrances’s P/E ratio is 44.72. That means that at current prices, buyers pay $44.72 for every $1 in trailing yearly profits.

See our latest analysis for International Flavors & Fragrances

How Do I Calculate International Flavors & Fragrances’s Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for International Flavors & Fragrances:

P/E of 44.72 = $146.03 ÷ $3.27 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

International Flavors & Fragrances saw earnings per share decrease by 16% last year. And it has shrunk its earnings per share by 6.3% per year over the last five years. This could justify a pessimistic P/E.

Does International Flavors & Fragrances Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, International Flavors & Fragrances has a higher P/E than the average company (18.8) in the chemicals industry.

NYSE:IFF Price Estimation Relative to Market, July 4th 2019
NYSE:IFF Price Estimation Relative to Market, July 4th 2019

That means that the market expects International Flavors & Fragrances will outperform other companies in its industry.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

International Flavors & Fragrances’s Balance Sheet

International Flavors & Fragrances has net debt equal to 26% of its market cap. While it’s worth keeping this in mind, it isn’t a worry.

The Bottom Line On International Flavors & Fragrances’s P/E Ratio

International Flavors & Fragrances’s P/E is 44.7 which is above average (18.2) in the US market. 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.

Investors should be looking to buy stocks that the market is wrong about. 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.

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.