Yahoo Finance What Does Alliance Pharma plc's (LON:APH) P/E Ratio Tell You?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Alliance Pharma plc's (LON:APH) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Alliance Pharma has a P/E ratio of 20.90. In other words, at today's prices, investors are paying £20.90 for every £1 in prior year profit.
View our latest analysis for Alliance Pharma
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Alliance Pharma:
P/E of 20.90 = GBP0.86 ÷ GBP0.04 (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 GBP1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Alliance Pharma's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Alliance Pharma has a P/E ratio that is fairly close for the average for the pharmaceuticals industry, which is 20.7.
Alliance Pharma's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Alliance Pharma actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Alliance Pharma saw earnings per share decrease by 19% last year. But it has grown its earnings per share by 4.7% per year over the last five years. And it has shrunk its earnings per share by 4.7% per year over the last three years. This growth rate might warrant a low P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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 Alliance Pharma's Debt Impact Its P/E Ratio?
Alliance Pharma has net debt worth 16% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Alliance Pharma's P/E Ratio
Alliance Pharma's P/E is 20.9 which is above average (18.2) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.
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 Alliance Pharma. 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.
