Unfortunately for some shareholders, the Sonova Holding (VTX:SOON) share price has dived 33% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 23% 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
See our latest analysis for Sonova Holding
Does Sonova Holding Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 16.23 that sentiment around Sonova Holding isn't particularly high. The image below shows that Sonova Holding has a lower P/E than the average (35.2) P/E for companies in the medical equipment industry.
Sonova Holding'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 Sonova Holding, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Sonova Holding's earnings made like a rocket, taking off 51% last year. And earnings per share have improved by 24% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.