Do You Know What Varian Medical Systems, Inc.'s (NYSE:VAR) P/E Ratio Means?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Varian Medical Systems, Inc.'s (NYSE:VAR) P/E ratio and reflect on what it tells us about the company's share price. Varian Medical Systems has a P/E ratio of 29.55, based on the last twelve months. That corresponds to an earnings yield of approximately 3.4%.
Check out our latest analysis for Varian Medical Systems
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 Varian Medical Systems:
P/E of 29.55 = $109.55 ÷ $3.71 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Varian Medical Systems's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Varian Medical Systems has a lower P/E than the average (42.5) in the medical equipment industry classification.
Varian Medical Systems's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Varian Medical Systems's earnings made like a rocket, taking off 203% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 2.8%. Unfortunately, earnings per share are down 1.2% a year, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Varian Medical Systems's P/E?
Since Varian Medical Systems holds net cash of US$120m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Varian Medical Systems's P/E Ratio
Varian Medical Systems trades on a P/E ratio of 29.5, which is above its market average of 17.5. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Varian Medical Systems to have a high P/E ratio.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
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.
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.
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. Thank you for reading.
