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A Rising Share Price Has Us Looking Closely At Bio-Techne Corporation's (NASDAQ:TECH) P/E Ratio

Simply Wall St

Bio-Techne (NASDAQ:TECH) shareholders are no doubt pleased to see that the share price has had a great month, posting a 40% gain, recovering from prior weakness. And the full year gain of 39% isn't too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Bio-Techne

How Does Bio-Techne's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 55.17 that there is some investor optimism about Bio-Techne. As you can see below, Bio-Techne has a higher P/E than the average company (32.6) in the life sciences industry.

NasdaqGS:TECH Price Estimation Relative to Market May 11th 2020

Its relatively high P/E ratio indicates that Bio-Techne shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors 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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

Bio-Techne's 53% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 35% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

So What Does Bio-Techne's Balance Sheet Tell Us?

Bio-Techne's net debt is 1.5% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On Bio-Techne's P/E Ratio

Bio-Techne's P/E is 55.2 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio. What we know for sure is that investors have become much more excited about Bio-Techne recently, since they have pushed its P/E ratio from 39.3 to 55.2 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Bio-Techne. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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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