The pharmaceutical industry provides investors a vast array of value investing opportunities, from companies that focus on research and development activities to drug manufacturing and sales. Prior to investing in a company that operates in the drugs sector or a fund that focuses its investment in the industry, it is beneficial for an investor to conduct an analysis of the investment's value. A metric commonly used to evaluate whether a specific company or industry is a viable investment is the price-to-earnings ratio, also referred to as the P/E ratio. As of March 2015, the drugs sector has an average P/E ratio of 24.10.
Calculating the Price-to-Earnings Ratio
The P/E ratio of a company is calculated by dividing its market value per share by the earnings per share, or EPS, and companies that have a P/E ratio between 20 and 25 are considered acceptable for value investors. This metric represents the amount of money an investor is willing to pay for each dollar of earnings. For instance, a company with a P/E ratio of 20 means each dollar of earnings is expected to cost an investor $20. Although a company's P/E ratio is not a tell-all for valuation, it does provide a quick analysis for value investors that does not require an in-depth review of a company's financial statements.
P/E Ratio for the Drugs Sector
The average P/E ratio for the drugs sector of 24.10 is higher than the average P/E ratio for the broader health care sector, currently at 16.35. The drugs sector average is comprised of P/E ratios from a number of small-, mid- and large-cap drug manufacturers, including Biostar Pharmaceuticals (Nasdaq: BSPM) with a P/E ratio of 7.62, GlaxoSmithKline (NYSE: GSK) with a P/E ratio of 44.42 and AstraZeneca PLC (NYSE: AZN) with a P/E ratio of 74.41.