This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Charles River Laboratories International, Inc.'s (NYSE:CRL) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Charles River Laboratories International has a P/E ratio of 28.82. That corresponds to an earnings yield of approximately 3.5%.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Charles River Laboratories International:
P/E of 28.82 = $135.14 ÷ $4.69 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
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.
Charles River Laboratories International's earnings made like a rocket, taking off 79% last year. The cherry on top is that the five year growth rate was an impressive 17% per year. With that kind of growth rate we would generally expect a high P/E ratio.
How Does Charles River Laboratories International's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (35.5) for companies in the life sciences industry is higher than Charles River Laboratories International's P/E.
Its relatively low P/E ratio indicates that Charles River Laboratories International shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Charles River Laboratories International, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Charles River Laboratories International's Balance Sheet
Charles River Laboratories International's net debt is 22% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On Charles River Laboratories International's P/E Ratio
Charles River Laboratories International has a P/E of 28.8. That's higher than the average in the US market, which is 18.2. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So on this analysis a high P/E ratio seems reasonable.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Charles River Laboratories International. So you may wish to see this free collection of other companies that have grown earnings strongly.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.