Should You Be Tempted To Sell FLIR Systems Inc (NASDAQ:FLIR) Because Of Its P/E Ratio?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how FLIR Systems Inc's (NASDAQ:FLIR) P/E ratio could help you assess the value on offer. Based on the last twelve months, FLIR Systems's P/E ratio is 60.49. That means that at current prices, buyers pay $60.49 for every $1 in trailing yearly profits.

See our latest analysis for FLIR Systems

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for FLIR Systems:

P/E of 60.49 = $54.27 ÷ $0.90 (Based on the year to June 2018.)

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. 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

When earnings fall, the 'E' decreases, over time. 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.

FLIR Systems shrunk earnings per share by 43% over the last year. And EPS is down 4.7% a year, over the last 5 years. This could justify a pessimistic P/E.

How Does FLIR Systems's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, FLIR Systems has a higher P/E than the average company (25.3) in the electronic industry.

That means that the market expects FLIR Systems will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 FLIR Systems's Debt Impact Its P/E Ratio?

Since FLIR Systems holds net cash of US$51m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On FLIR Systems's P/E Ratio

FLIR Systems trades on a P/E ratio of 60.5, which is multiples above the US market average of 18.2. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this freereport on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than FLIR Systems. So you may wish to see this freecollection of other companies that have grown earnings strongly.

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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.