Why the high P / E ratio from MKS Instruments, Inc. (NASDAQ: MKSI) isn't necessarily bad

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Today we present the concept of P / E for those who learn about investing. We'll look at MKS Instruments, Inc.'s (NASDAQ: MKSI) P / E ratio and think about what it says about the company's stock price. Based on the past twelve months, MKS Instruments' P / E ratio is 35.99, This corresponds to a return on earnings of around 2.8%.

Check out our latest analysis for MKS Instruments

How do you calculate a P / E ratio?

The Formula for price to profit is:

Price-earnings ratio = price per share ÷ earnings per share (EPS)

Or for MKS Instruments:

P / E of $ 35.99 = $ 111.83 – $ 3.11 (based on year to September 2019)

Is it good value for money?

A higher P / E ratio means that investors pay a higher price for the profitability of the business. That's not necessarily a good or bad thing, but a high P / E implies relatively high expectations of what a company can achieve in the future.

Does MKS Instruments have a relatively high or low P / E ratio for its industry?

The P / E indicates whether the market has higher or lower expectations of a company. The figure below shows that the average P / E ratio (34.0) for companies in the semiconductor industry roughly corresponds to the P / E ratio of MKS Instruments.

NasdaqGS: MKSI price estimate compared to the market, January 3, 2020
NasdaqGS: MKSI price estimate compared to the market, January 3, 2020

This indicates that the market assumes that MKS Instruments will develop somewhat like other companies in its sector. If the company has above-average prospects, the market may underestimate it. I would clarify my position through review Insider buying and selling., amongst other things.

How growth rates affect P / E

Earnings growth rates have a big impact on earnings. Earnings growth means that in the future the "E" will be higher. That said, even if the current P / E ratio is high, it will decrease over time if the stock price remains unchanged. And if the P / E ratio drops, the company will look cheap unless the share price goes up.

MKS Instruments shrank earnings per share by 58% last year. However, earnings per share have increased by 10% per year in the past five years.

Don't forget: The P / E does not take into account debts or bank deposits

A disadvantage of using a P / E is that market capitalization is taken into account, but not the balance sheet. In other words, it does not take into account any debts or cash that the company may have on its balance sheet. A company could hypothetically lower its future P / E ratio by spending its cash (or borrowing) to generate higher profits.

Such expenses may be good or bad overall, but the key point here is that you need to look at debt to understand the P / E context.

How does MKS Instruments' debt affect the P / E ratio?

Net debt is only 6.9% of MKS Instruments' market capitalization. The market could assign him a higher P / E ratio if he has net cash, but this low net borrowing is unlikely to have a major impact on the P / E ratio.

The judgment on the P / E ratio from MKS Instruments

MKS Instruments has a P / E ratio of 36.0. That is more than the average in its market, which is 18.9. With a modest level of debt, but without EPS growth in the past year, the P / E can be expected to be optimistic about the future profits of the market.

Investors have the option if market expectations regarding a stock are wrong. Value investor Benjamin Graham said: “In the short term, the market is an election machine, but in the long term it is a balance. So that free A visual report on analyst forecasts could be the key to making an excellent investment decision.

But note: MKS Instruments may not be the best stock to buy, So take a look free List of interesting companies with strong recent earnings growth (and a P / E under 20).

If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.