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It's great to see Eurofins Scientific (EPA:ERF) shareholders have their patience rewarded with a 30% share price pop in the last month. And the full year gain of 38% isn't too shabby, either!
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for Eurofins Scientific
How Does Eurofins Scientific's P/E Ratio Compare To Its Peers?
Eurofins Scientific's P/E of 70.51 indicates some degree of optimism towards the stock. As you can see below, Eurofins Scientific has a higher P/E than the average company (62.8) in the life sciences industry.
Its relatively high P/E ratio indicates that Eurofins Scientific 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 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
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Eurofins Scientific saw earnings per share decrease by 17% last year. But EPS is up 9.7% over the last 5 years. And EPS is down 1.9% a year, over the last 3 years. This could justify a low P/E.
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. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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 Eurofins Scientific's Debt Impact Its P/E Ratio?
Net debt totals 25% of Eurofins Scientific's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.