U.S. Markets closed
  • S&P 500

    3,298.46
    +51.87 (+1.60%)
     
  • Nasdaq

    10,913.56
    +241.29 (+2.26%)
     
  • Russell 2000

    1,474.91
    +23.09 (+1.59%)
     
  • Crude Oil

    40.04
    -0.27 (-0.67%)
     
  • Gold

    1,864.30
    -12.60 (-0.67%)
     
  • Silver

    22.99
    -0.21 (-0.91%)
     
  • EUR/USD

    1.1639
    -0.0037 (-0.3142%)
     
  • 10-Yr Bond

    0.6590
    -0.0070 (-1.05%)
     
  • Vix

    26.38
    -2.13 (-7.47%)
     
  • GBP/USD

    1.2744
    -0.0007 (-0.0586%)
     
  • BTC-USD

    10,708.62
    -51.96 (-0.48%)
     
  • CMC Crypto 200

    230.19
    +12.36 (+5.67%)
     
  • FTSE 100

    5,842.67
    +19.89 (+0.34%)
     
  • Nikkei 225

    23,204.62
    +116.80 (+0.51%)
     

Does Varex Imaging Corporation’s (NASDAQ:VREX) P/E Ratio Signal A Buying Opportunity?

David Owens

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Varex Imaging Corporation’s (NASDAQ:VREX) P/E ratio could help you assess the value on offer. Based on the last twelve months, Varex Imaging’s P/E ratio is 32.21. In other words, at today’s prices, investors are paying $32.21 for every $1 in prior year profit.

See our latest analysis for Varex Imaging

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Varex Imaging:

P/E of 32.21 = $23.37 ÷ $0.73 (Based on the trailing twelve months to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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.

Varex Imaging saw earnings per share decrease by 47% last year. And it has shrunk its earnings per share by 26% per year over the last three years. This growth rate might warrant a low P/E ratio. This growth rate might warrant a low P/E ratio.

How Does Varex Imaging’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Varex Imaging has a lower P/E than the average (46.9) in the medical equipment industry classification.

NasdaqGS:VREX PE PEG Gauge December 19th 18
NasdaqGS:VREX PE PEG Gauge December 19th 18

Its relatively low P/E ratio indicates that Varex Imaging shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Is Debt Impacting Varex Imaging’s P/E?

Varex Imaging has net debt worth 38% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Varex Imaging’s P/E Ratio

Varex Imaging’s P/E is 32.2 which is above average (16.5) in the US market. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

But note: Varex Imaging may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.