Why Kulicke and Soffa Industries Inc’s (NASDAQ:KLIC) High P/E Ratio Isn’t Necessarily A Bad Thing

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 Kulicke and Soffa Industries Inc’s (NASDAQ:KLIC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Kulicke and Soffa Industries’s P/E ratio is 21.06. That means that at current prices, buyers pay $21.06 for every $1 in trailing yearly profits.

Check out our latest analysis for Kulicke and Soffa Industries

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Kulicke and Soffa Industries:

P/E of 21.06 = $20.48 ÷ $0.97 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Kulicke and Soffa Industries’s earnings per share fell by 29% in the last twelve months. But EPS is up 3.1% over the last 5 years.

How Does Kulicke and Soffa Industries’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Kulicke and Soffa Industries has a higher P/E than the average (17.5) P/E for companies in the semiconductor industry.

NasdaqGS:KLIC PE PEG Gauge November 15th 18
NasdaqGS:KLIC PE PEG Gauge November 15th 18

Kulicke and Soffa Industries’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).

How Does Kulicke and Soffa Industries’s Debt Impact Its P/E Ratio?

Since Kulicke and Soffa Industries holds net cash of US$605m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Kulicke and Soffa Industries’s P/E Ratio

Kulicke and Soffa Industries’s P/E is 21.1 which is above average (17.9) in the US market. The recent drop in earnings per share would make some investors cautious, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.

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 free report on the analyst consensus forecasts could help you make a master move on this stock.

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.