Yahoo Finance A Rising Share Price Has Us Looking Closely At Clinigen Group plc's (LON:CLIN) P/E Ratio
Clinigen Group (LON:CLIN) shareholders are no doubt pleased to see that the share price has bounced 47% in the last month alone, although it is still down 29% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 26% in the last year.
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. Perhaps the simplest way to get a read on investors' expectations of a business 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 Clinigen Group
Does Clinigen Group Have A Relatively High Or Low P/E For Its Industry?
Clinigen Group has a P/E ratio of 65.59. The image below shows that Clinigen Group has a P/E ratio that is roughly in line with the life sciences industry average (65.6).
That indicates that the market expects Clinigen Group will perform roughly in line with other companies in its industry. So if Clinigen Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Clinigen Group saw earnings per share decrease by 48% last year. And EPS is down 12% a year, over the last 5 years. This growth rate might warrant a below 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
So What Does Clinigen Group's Balance Sheet Tell Us?
Clinigen Group's net debt equates to 33% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Clinigen Group's P/E Ratio
Clinigen Group's P/E is 65.6 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. With some debt but no EPS growth last year, the market has high expectations of future profits. What we know for sure is that investors have become much more excited about Clinigen Group recently, since they have pushed its P/E ratio from 44.6 to 65.6 over the last month. 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.
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.
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.
