Yahoo Finance What Does Bruker Corporation’s (NASDAQ:BRKR) PE Ratio Tell You?
This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Bruker Corporation (NASDAQ:BRKR) is trading with a trailing P/E of 60.3, which is higher than the industry average of 43.7. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
Check out our latest analysis for Bruker
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for BRKR
Price-Earnings Ratio = Price per share ÷ Earnings per share
BRKR Price-Earnings Ratio = $35.44 ÷ $0.587 = 60.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BRKR, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. BRKR’s P/E of 60.3 is higher than its industry peers (43.7), which implies that each dollar of BRKR’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 19 Life Sciences companies in US including BIOQUAL, Bio-Rad Laboratories and Cambrex. You could also say that the market is suggesting that BRKR is a stronger business than the average comparable company.
A few caveats
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to BRKR. If not, the difference in P/E might be a result of other factors. For example, Bruker Corporation could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to BRKR may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
Since you may have already conducted your due diligence on BRKR, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BRKR’s future growth? Take a look at our free research report of analyst consensus for BRKR’s outlook.
Past Track Record: Has BRKR been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of BRKR’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
