The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at International Flavors & Fragrances Inc.'s ( NYSE:IFF ) P/E ratio and reflect on what it tells us about the company's share price. What is International Flavors & Fragrances's P/E ratio? Well, based on the last twelve months it is 41.52. That means that at current prices, buyers pay $41.52 for every $1 in trailing yearly profits.
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How Do I Calculate International Flavors & Fragrances's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for International Flavors & Fragrances:
P/E of 41.52 = $135.59 ÷ $3.27 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
International Flavors & Fragrances shrunk earnings per share by 16% over the last year. And over the longer term (5 years) earnings per share have decreased 6.3% annually. This could justify a pessimistic P/E.
Does International Flavors & Fragrances Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that International Flavors & Fragrances has a higher P/E than the average (17.9) P/E for companies in the chemicals industry.
International Flavors & Fragrances's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling .
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
How Does International Flavors & Fragrances's Debt Impact Its P/E Ratio?
Net debt is 28% of International Flavors & Fragrances's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On International Flavors & Fragrances's P/E Ratio
International Flavors & Fragrances's P/E is 41.5 which is above average (17.9) in the US market. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.
Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
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.
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 email@example.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.