This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Amneal Pharmaceuticals, Inc.’s (NYSE:AMRX) P/E ratio and reflect on what it tells us about the company’s share price. Based on our calculations, Amneal Pharmaceuticals’ forward P/E ratio is 13.72. That means that at current prices, buyers would pay $13.72 for every $1 in forecast yearly profits. View our latest analysis for Amneal Pharmaceuticals
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How Do You Calculate A P/E Ratio?
- The formula for P/E is:
- Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
- Or for Amneal Pharmaceuticals:
- Future P/E of 13.72 = $12.49 ÷ $0.91 (Based on the mid point of Amneal’s adjusted EPS guidance for this year)
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 earns. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future. We note that Amneal has recently merged with Impax Laboratories, creating a large pharmaceutical business with more than 200 differentiated product categories, and a further 135 projects in active stages of development. Amneal’s lower P/E may be due to the market waiting to evaluate the performance of the combined business.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining whether a company’s P/E is reasonable is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
How Does Amneal Pharmaceuticals’s Forecast Growth Compare To Expectations?
We can get an indication of market expectations by looking at the P/E ratio. Amneal’s PE is below the 19.2x reported by the Pharmaceutical industry which could suggest, as noted above, that the market is uncertain about the combined company’s prospects.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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). 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 this option (or lack thereof).
How Does Amneal Pharmaceuticals’s Debt Impact Its P/E Ratio?
Amneal Pharmaceuticals has seen growing debt and higher interest expenses due to the merger with Impax, according to a recent quarterly update. Debt can be used to grow earnings, making a P/E ratio look more attractive, although this doesn’t take into account the greater enterprise value and possible higher risk of an indebted business.
The Bottom Line On Amneal Pharmaceuticals’s P/E Ratio
Amneal Pharmaceuticals has a P/E of 13.7 based on company guidance for the full year. This P/E is below the average in the US market, which is 17. The company may have significant debt, but EPS growth is forecast to be strong. If Amneal can continue to grow earnings, then the current P/E may be unjustifiably low. Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
- Future Outlook: See what well-informed industry analysts are predicting for AMRX’s future growth? Take a look at our free research report of analyst consensus for AMRX’s outlook.
- Valuation: What is AMRX worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether AMRX is currently mispriced by the market.
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 email@example.com.