Is Amphastar Pharmaceuticals Inc (NASDAQ:AMPH) A Sell At Its Current PE Ratio?
Amphastar Pharmaceuticals Inc (NASDAQ:AMPH) is currently trading at a trailing P/E of 188.9x, which is higher than the industry average of 22.9x. While this makes AMPH appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Amphastar Pharmaceuticals
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for AMPH
Price-Earnings Ratio = Price per share ÷ Earnings per share
AMPH Price-Earnings Ratio = $18.47 ÷ $0.098 = 188.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AMPH, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since AMPH’s P/E of 188.9x is higher than its industry peers (22.9x), it means that investors are paying more than they should for each dollar of AMPH’s earnings. As such, our analysis shows that AMPH represents an over-priced stock.
A few caveats
Before you jump to the conclusion that AMPH should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to AMPH, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with AMPH, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing AMPH to are fairly valued by the market. If this is violated, AMPH’s P/E may be lower than its peers as they are actually overvalued by investors.
To help readers see pass 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.
