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How Does IRadimed's (NASDAQ:IRMD) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

To the annoyance of some shareholders, IRadimed (NASDAQ:IRMD) shares are down a considerable 42% in the last month. That drop has capped off a tough year for shareholders, with the share price down 42% in that time.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for IRadimed

Does IRadimed Have A Relatively High Or Low P/E For Its Industry?

IRadimed's P/E of 18.84 indicates relatively low sentiment towards the stock. If you look at the image below, you can see IRadimed has a lower P/E than the average (32.9) in the medical equipment industry classification.

NasdaqCM:IRMD Price Estimation Relative to Market, March 22nd 2020

Its relatively low P/E ratio indicates that IRadimed shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, IRadimed grew EPS by a whopping 46% in the last year. And its annual EPS growth rate over 5 years is 29%. I'd therefore be a little surprised if its P/E ratio was not relatively high.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

So What Does IRadimed's Balance Sheet Tell Us?

With net cash of US$46m, IRadimed has a very strong balance sheet, which may be important for its business. Having said that, at 24% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On IRadimed's P/E Ratio

IRadimed trades on a P/E ratio of 18.8, which is above its market average of 11.8. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect IRadimed to have a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about IRadimed over the last month, with the P/E ratio falling from 32.4 back then to 18.8 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than IRadimed. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.