Yahoo Finance How Does FLIR Systems's (NASDAQ:FLIR) P/E Compare To Its Industry, After Its Big Share Price Gain?
Those holding FLIR Systems (NASDAQ:FLIR) shares must be pleased that the share price has rebounded 36% in the last thirty days. But unfortunately, the stock is still down by 27% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 23% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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 FLIR Systems
How Does FLIR Systems's P/E Ratio Compare To Its Peers?
FLIR Systems's P/E of 31.35 indicates some degree of optimism towards the stock. As you can see below, FLIR Systems has a higher P/E than the average company (15.4) in the electronic industry.
Its relatively high P/E ratio indicates that FLIR Systems shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
FLIR Systems shrunk earnings per share by 38% over the last year. But it has grown its earnings per share by 1.5% per year over the last three years. And it has shrunk its earnings per share by 2.2% per year over the last five years. This growth rate might warrant a below average P/E ratio.
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 FLIR Systems's Debt Impact Its P/E Ratio?
Net debt totals just 7.3% of FLIR Systems's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On FLIR Systems's P/E Ratio
FLIR Systems trades on a P/E ratio of 31.3, which is above its market average of 13.3. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What is very clear is that the market has become significantly more optimistic about FLIR Systems over the last month, with the P/E ratio rising from 23.1 back then to 31.3 today. 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. 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 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.
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.
