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 Regeneron Pharmaceuticals, Inc.'s (NASDAQ:REGN) P/E ratio to inform your assessment of the investment opportunity. Regeneron Pharmaceuticals has a price to earnings ratio of 15.06, based on the last twelve months. That is equivalent to an earnings yield of about 6.6%.
How Do You Calculate Regeneron Pharmaceuticals's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Regeneron Pharmaceuticals:
P/E of 15.06 = $286.85 ÷ $19.05 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does Regeneron Pharmaceuticals'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. We can see in the image below that the average P/E (19.1) for companies in the biotechs industry is higher than Regeneron Pharmaceuticals's P/E.
Its relatively low P/E ratio indicates that Regeneron Pharmaceuticals shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Regeneron Pharmaceuticals, 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.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. 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.
Regeneron Pharmaceuticals increased earnings per share by a whopping 28% last year. And it has bolstered its earnings per share by 36% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
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. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Regeneron Pharmaceuticals's Debt Impact Its P/E Ratio?
Regeneron Pharmaceuticals has net cash of US$2.7b. 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 Regeneron Pharmaceuticals's P/E Ratio
Regeneron Pharmaceuticals has a P/E of 15.1. That's below the average in the US market, which is 17. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic.
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.
You might be able to find a better buy than Regeneron Pharmaceuticals. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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. Thank you for reading.