Yahoo Finance Despite Its High P/E Ratio, Is Proto Labs, Inc. (NYSE:PRLB) Still Undervalued?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Proto Labs, Inc.'s (NYSE:PRLB) P/E ratio and reflect on what it tells us about the company's share price. Proto Labs has a price to earnings ratio of 38.53, based on the last twelve months. That is equivalent to an earnings yield of about 2.6%.
Check out our latest analysis for Proto Labs
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Proto Labs:
P/E of 38.53 = $102.68 ÷ $2.67 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Proto Labs's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Proto Labs has a higher P/E than the average (20.1) P/E for companies in the machinery industry.
Its relatively high P/E ratio indicates that Proto Labs shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
It's great to see that Proto Labs grew EPS by 12% in the last year. And earnings per share have improved by 11% annually, over the last five years. So one might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting Proto Labs's P/E?
Proto Labs has net cash of US$136m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Proto Labs's P/E Ratio
Proto Labs's P/E is 38.5 which is above average (17.7) in its market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.
But note: Proto Labs may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
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. Thank you for reading.
