With a price-to-earnings (or "P/E") ratio of 72.7x STAAR Surgical Company (NASDAQ:STAA) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
With earnings that are retreating more than the market's of late, STAAR Surgical has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for STAAR Surgical
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as STAAR Surgical's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. Even so, admirably EPS has lifted 101% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next three years should generate growth of 35% each year as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 12% per year growth forecast for the broader market.
With this information, we can see why STAAR Surgical is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On STAAR Surgical's P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of STAAR Surgical's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Before you settle on your opinion, we've discovered 2 warning signs for STAAR Surgical (1 is potentially serious!) that you should be aware of.
You might be able to find a better investment than STAAR Surgical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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