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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Thermo Fisher Scientific Inc.’s (NYSE:TMO) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Thermo Fisher Scientific’s P/E ratio is 38.64. That is equivalent to an earnings yield of about 2.6%.
How Do I Calculate Thermo Fisher Scientific’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Thermo Fisher Scientific:
P/E of 38.64 = $305.43 ÷ $7.91 (Based on the trailing twelve months 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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
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. When earnings grow, the ‘E’ increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that Thermo Fisher Scientific grew EPS by a stonking 39% in the last year. And its annual EPS growth rate over 5 years is 15%. So we’d generally expect it to have a relatively high P/E ratio.
How Does Thermo Fisher Scientific’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Thermo Fisher Scientific has a P/E ratio that is roughly in line with the life sciences industry average (39.9).
Its P/E ratio suggests that Thermo Fisher Scientific shareholders think that in the future it will perform about the same as other companies in its industry classification.
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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).
Is Debt Impacting Thermo Fisher Scientific’s P/E?
Thermo Fisher Scientific has net debt worth 14% of its market capitalization. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Bottom Line On Thermo Fisher Scientific’s P/E Ratio
Thermo Fisher Scientific’s P/E is 38.6 which is above average (18.2) in the US market. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So to be frank we are not surprised it has a high P/E ratio.
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 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 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 firstname.lastname@example.org. 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.