Zimmer Biomet Holdings, Inc.'s (NYSE:ZBH) Share Price Not Quite Adding Up

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Zimmer Biomet Holdings, Inc. (NYSE:ZBH) as a stock to potentially avoid with its 21.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Zimmer Biomet Holdings has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Zimmer Biomet Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zimmer Biomet Holdings.

Does Growth Match The High P/E?

Zimmer Biomet Holdings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 100% last year. As a result, it also grew EPS by 11% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the analysts watching the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's curious that Zimmer Biomet Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zimmer Biomet Holdings currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Zimmer Biomet Holdings that you need to be mindful of.

You might be able to find a better investment than Zimmer Biomet Holdings. 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.