Why Investors Shouldn't Be Surprised By Edwards Lifesciences Corporation's (NYSE:EW) P/E

With a price-to-earnings (or "P/E") ratio of 39.6x Edwards Lifesciences Corporation (NYSE:EW) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

The recently shrinking earnings for Edwards Lifesciences have been in line with the market. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Edwards Lifesciences

Want the full picture on analyst estimates for the company? Then our free report on Edwards Lifesciences will help you uncover what's on the horizon.

How Is Edwards Lifesciences' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Edwards Lifesciences' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 3.4% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 72% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 10% each year, which is noticeably less attractive.

With this information, we can see why Edwards Lifesciences is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Edwards Lifesciences' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Edwards Lifesciences that you should be aware of.

You might be able to find a better investment than Edwards Lifesciences. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com