This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Cantel Medical Corp.’s (NYSE:CMD) P/E ratio and reflect on what it tells us about the company’s share price. Cantel Medical has a price to earnings ratio of 38.85, based on the last twelve months. In other words, at today’s prices, investors are paying $38.85 for every $1 in prior year profit.
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 Cantel Medical:
P/E of 38.85 = $68.48 ÷ $1.76 (Based on the year to January 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Cantel Medical saw earnings per share decrease by 18% last year. But over the longer term (5 years) earnings per share have increased by 17%.
How Does Cantel Medical’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Cantel Medical has a lower P/E than the average (42.9) P/E for companies in the medical equipment industry.
Cantel Medical’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Cantel Medical, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Cantel Medical’s Balance Sheet
Net debt totals just 5.5% of Cantel Medical’s market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Bottom Line On Cantel Medical’s P/E Ratio
Cantel Medical has a P/E of 38.9. That’s higher than the average in the US market, which is 17.6. With some debt but no EPS growth last year, the market has high expectations of future profits.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Cantel Medical 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).
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.