This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Bio-Rad Laboratories Inc (NYSE:BIO)’s fundamentals and stock market performance.
Bio-Rad Laboratories Inc (NYSE:BIO) is trading with a trailing P/E of 11.6x, which is lower than the industry average of 40.5x. While this makes BIO appear like a great stock to buy, 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. View out our latest analysis for Bio-Rad Laboratories
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for BIO
Price-Earnings Ratio = Price per share ÷ Earnings per share
BIO Price-Earnings Ratio = $298.32 ÷ $25.806 = 11.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BIO, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 11.6x, BIO’s P/E is lower than its industry peers (40.5x). This implies that investors are undervaluing each dollar of BIO’s earnings. Therefore, according to this analysis, BIO is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy BIO immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BIO, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with BIO, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing BIO to are fairly valued by the market. If this does not hold, there is a possibility that BIO’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of BIO to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for BIO’s future growth? Take a look at our free research report of analyst consensus for BIO’s outlook.
- Past Track Record: Has BIO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of BIO’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.