Don’t Sell Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) Before You Read This

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Enanta Pharmaceuticals, Inc.’s (NASDAQ:ENTA), to help you decide if the stock is worth further research. Enanta Pharmaceuticals has a P/E ratio of 20.33, based on the last twelve months. That means that at current prices, buyers pay $20.33 for every $1 in trailing yearly profits.

View our latest analysis for Enanta Pharmaceuticals

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 Enanta Pharmaceuticals:

P/E of 20.33 = $81.54 ÷ $4.01 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Enanta Pharmaceuticals Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (19.5) for companies in the biotechs industry is roughly the same as Enanta Pharmaceuticals’s P/E.

NasdaqGS:ENTA Price Estimation Relative to Market, July 17th 2019
NasdaqGS:ENTA Price Estimation Relative to Market, July 17th 2019

Its P/E ratio suggests that Enanta Pharmaceuticals shareholders think that in the future it will perform about the same as other companies in its industry classification.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Notably, Enanta Pharmaceuticals grew EPS by a whopping 47% in the last year. And it has improved its earnings per share by 32% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio.

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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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).

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Enanta Pharmaceuticals’s Balance Sheet

Enanta Pharmaceuticals has net cash of US$368m. This is fairly high at 23% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Enanta Pharmaceuticals’s P/E Ratio

Enanta Pharmaceuticals’s P/E is 20.3 which is above average (18) in its market. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Enanta Pharmaceuticals. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.