# Should You Be Tempted To Sell PerkinElmer, Inc. (NYSE:PKI) Because Of Its 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 apply a basic P/E ratio analysis to PerkinElmer, Inc.’s (NYSE:PKI), to help you decide if the stock is worth further research. PerkinElmer has a price to earnings ratio of 42.65, based on the last twelve months. That means that at current prices, buyers pay \$42.65 for every \$1 in trailing yearly profits.

### How Do You Calculate PerkinElmer’s P/E Ratio?

The formula for P/E is:

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

Or for PerkinElmer:

P/E of 42.65 = \$95.18 ÷ \$2.23 (Based on the year to March 2019.)

### Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each \$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

### Does PerkinElmer 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. As you can see below, PerkinElmer has a higher P/E than the average company (39.4) in the life sciences industry.

That means that the market expects PerkinElmer will outperform other companies in its industry.

### How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

In the last year, PerkinElmer grew EPS like Taylor Swift grew her fan base back in 2010; the 67% gain was both fast and well deserved. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 9.5%.

### A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

### So What Does PerkinElmer’s Balance Sheet Tell Us?

PerkinElmer’s net debt is 16% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

### The Bottom Line On PerkinElmer’s P/E Ratio

PerkinElmer has a P/E of 42.6. That’s higher than the average in its market, which is 18. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than PerkinElmer. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.