Yahoo Finance A Rising Share Price Has Us Looking Closely At Smiths Group plc's (LON:SMIN) P/E Ratio
Those holding Smiths Group (LON:SMIN) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 35% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 27% in the last year.
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). 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). 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.
See our latest analysis for Smiths Group
Does Smiths Group Have A Relatively High Or Low P/E For Its Industry?
Smiths Group's P/E of 45.81 indicates some degree of optimism towards the stock. As you can see below, Smiths Group has a much higher P/E than the average company (12.1) in the industrials industry.
That means that the market expects Smiths Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Notably, Smiths Group grew EPS by a whopping 48% in the last year. But earnings per share are down 15% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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).
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).
Is Debt Impacting Smiths Group's P/E?
Smiths Group's net debt equates to 27% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Smiths Group's P/E Ratio
Smiths Group's P/E is 45.8 which is way above average (13.3) in its market. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable. What is very clear is that the market has become significantly more optimistic about Smiths Group over the last month, with the P/E ratio rising from 35.0 back then to 45.8 today. 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. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Smiths Group. 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.
