Unfortunately for some shareholders, the Integra LifeSciences Holdings (NASDAQ:IART) share price has dived 33% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 30% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
How Does Integra LifeSciences Holdings's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 67.77 that there is some investor optimism about Integra LifeSciences Holdings. You can see in the image below that the average P/E (32.7) for companies in the medical equipment industry is lower than Integra LifeSciences Holdings's P/E.
That means that the market expects Integra LifeSciences Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Integra LifeSciences Holdings saw earnings per share decrease by 20% last year. And EPS is down 16% a year, over the last 3 years. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
So What Does Integra LifeSciences Holdings's Balance Sheet Tell Us?
Integra LifeSciences Holdings has net debt equal to 36% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Integra LifeSciences Holdings's P/E Ratio
Integra LifeSciences Holdings's P/E is 67.8 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. 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. Given Integra LifeSciences Holdings's P/E ratio has declined from 100.5 to 67.8 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Integra LifeSciences Holdings 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).
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.
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