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What Is Zoetis's (NYSE:ZTS) P/E Ratio After Its Share Price Rocketed?

Simply Wall St
·4 mins read

Zoetis (NYSE:ZTS) shareholders are no doubt pleased to see that the share price has bounced 35% in the last month alone, although it is still down 9.9% over the last quarter. And the full year gain of 23% isn't too shabby, either!

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Zoetis

Does Zoetis Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 39.75 that there is some investor optimism about Zoetis. The image below shows that Zoetis has a higher P/E than the average (22.5) P/E for companies in the pharmaceuticals industry.

NYSE:ZTS Price Estimation Relative to Market April 22nd 2020
NYSE:ZTS Price Estimation Relative to Market April 22nd 2020

That means that the market expects Zoetis will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Zoetis saw earnings per share improve by 6.1% last year. And it has bolstered its earnings per share by 22% per year over the last five years.

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

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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Zoetis's Debt Impact Its P/E Ratio?

Zoetis has net debt worth just 7.6% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On Zoetis's P/E Ratio

Zoetis has a P/E of 39.7. That's higher than the average in its market, which is 13.3. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future. What we know for sure is that investors have become much more excited about Zoetis recently, since they have pushed its P/E ratio from 29.5 to 39.7 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Zoetis. 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.

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. Thank you for reading.