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Do You Know What Envista Holdings Corporation's (NYSE:NVST) P/E Ratio Means?

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 Envista Holdings Corporation's (NYSE:NVST) P/E ratio to inform your assessment of the investment opportunity. What is Envista Holdings's P/E ratio? Well, based on the last twelve months it is 12.60. That means that at current prices, buyers pay $12.60 for every $1 in trailing yearly profits.

See our latest analysis for Envista Holdings

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Envista Holdings:

P/E of 12.60 = $20.130 ÷ $1.598 (Based on the trailing twelve months 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 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 Does Envista Holdings's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (38.0) for companies in the medical equipment industry is higher than Envista Holdings's P/E.

NYSE:NVST Price Estimation Relative to Market, March 10th 2020
NYSE:NVST Price Estimation Relative to Market, March 10th 2020

Envista Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Envista Holdings saw earnings per share decrease by 11% last year.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Envista Holdings's Balance Sheet Tell Us?

Net debt is 35% of Envista Holdings's market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Envista Holdings's P/E Ratio

Envista Holdings trades on a P/E ratio of 12.6, which is below the US market average of 15.1. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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