Do You Like Cerner Corporation (NASDAQ:CERN) At This P/E Ratio?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Cerner Corporation’s (NASDAQ:CERN) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Cerner’s P/E ratio is 22.96. That is equivalent to an earnings yield of about 4.4%.
Check out our latest analysis for Cerner
How Do I Calculate Cerner’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Cerner:
P/E of 22.96 = $57.95 ÷ $2.52 (Based on the trailing twelve months to September 2018.)
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 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. 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.
It’s great to see that Cerner grew EPS by 23% in the last year. And it has bolstered its earnings per share by 16% per year over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Cerner’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Cerner has a lower P/E than the average (59.3) in the healthcare services industry classification.
Cerner’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Cerner, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, 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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Cerner’s Debt Impact Its P/E Ratio?
Cerner has net cash of US$372m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Cerner’s P/E Ratio
Cerner trades on a P/E ratio of 23, which is above the US market average of 17.9. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average.
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 free visual report on analyst forecasts could hold they key to an excellent investment decision.
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.
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.
