Here’s What Palatin Technologies Inc’s (NYSEMKT:PTN) P/E Ratio Is Telling Us
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Palatin Technologies Inc’s (NYSEMKT:PTN) P/E ratio to inform your assessment of the investment opportunity. Palatin Technologies has a P/E ratio of 19.58, based on the last twelve months. In other words, at today’s prices, investors are paying $19.58 for every $1 in prior year profit.
View our latest analysis for Palatin Technologies
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Palatin Technologies:
P/E of 19.58 = $0.81 ÷ $0.041 (Based on the year 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Palatin Technologies’s earnings per share fell by 26% in the last twelve months. But EPS is up 28% over the last 5 years.
How Does Palatin Technologies’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Palatin Technologies has a lower P/E than the average (25.6) P/E for companies in the biotechs industry.
Palatin Technologies’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Palatin Technologies’s Balance Sheet
Palatin Technologies has net cash of US$28m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Palatin Technologies’s P/E Ratio
Palatin Technologies trades on a P/E ratio of 19.6, which is above the US market average of 17.9. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ 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.
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.
