When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Edwards Lifesciences Corporation (NYSE:EW) as a stock to avoid entirely with its 32.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been pleasing for Edwards Lifesciences as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Edwards Lifesciences
NYSE:EW Price to Earnings Ratio vs Industry December 18th 2023 Keen to find out how analysts think Edwards Lifesciences' future stacks up against the industry? In that case, our free report is a great place to start.
How Is Edwards Lifesciences' Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Edwards Lifesciences' to be considered reasonable.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 85% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per year over the next three years. That's shaping up to be similar to the 12% per annum growth forecast for the broader market.
With this information, we find it interesting that Edwards Lifesciences is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Edwards Lifesciences currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Edwards Lifesciences with six simple checks will allow you to discover any risks that could be an issue.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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