This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at BioSpecifics Technologies Corp.'s (NASDAQ:BSTC) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, BioSpecifics Technologies has a P/E ratio of 16.92. That corresponds to an earnings yield of approximately 5.9%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for BioSpecifics Technologies:
P/E of 16.92 = $54.02 ÷ $3.19 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does BioSpecifics Technologies's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (17.6) for companies in the biotechs industry is roughly the same as BioSpecifics Technologies's P/E.
BioSpecifics Technologies's P/E tells us that market participants think its prospects are roughly in line with its industry. So if BioSpecifics Technologies actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's nice to see that BioSpecifics Technologies grew EPS by a stonking 40% in the last year. And earnings per share have improved by 36% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting BioSpecifics Technologies's P/E?
With net cash of US$82m, BioSpecifics Technologies has a very strong balance sheet, which may be important for its business. Having said that, at 21% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On BioSpecifics Technologies's P/E Ratio
BioSpecifics Technologies trades on a P/E ratio of 16.9, which is fairly close to the US market average of 18.0. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect BioSpecifics Technologies to have a higher P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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