This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Integra LifeSciences Holdings Corporation’s (NASDAQ:IART) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Integra LifeSciences Holdings’s P/E ratio is 74.02. That means that at current prices, buyers pay $74.02 for every $1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Integra LifeSciences Holdings:
P/E of 74.02 = $43.390 ÷ $0.586 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High P/E 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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Integra LifeSciences Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Integra LifeSciences Holdings has a higher P/E than the average company (36.9) in the medical equipment industry.
Integra LifeSciences Holdings’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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Integra LifeSciences Holdings shrunk earnings per share by 20% over the last year. And it has shrunk its earnings per share by 16% per year over the last three years. This might lead to low expectations.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. 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 Integra LifeSciences Holdings’s Debt Impact Its P/E Ratio?
Integra LifeSciences Holdings’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 Integra LifeSciences Holdings’s P/E Ratio
With a P/E ratio of 74.0, Integra LifeSciences Holdings is expected to grow earnings very strongly in the years to come. 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 have an opportunity when market expectations about a stock are wrong. 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.
You might be able to find a better buy than Integra LifeSciences Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.