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What Is Apollo Medical Holdings's (NASDAQ:AMEH) P/E Ratio After Its Share Price Rocketed?

Simply Wall St

The Apollo Medical Holdings (NASDAQ:AMEH) share price has done well in the last month, posting a gain of 28%. And the full year gain of 22% isn't too shabby, either!

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Apollo Medical Holdings

How Does Apollo Medical Holdings's P/E Ratio Compare To Its Peers?

Apollo Medical Holdings's P/E of 70.62 indicates some degree of optimism towards the stock. The image below shows that Apollo Medical Holdings has a significantly higher P/E than the average (20.3) P/E for companies in the healthcare industry.

NasdaqCM:AMEH Price Estimation Relative to Market, September 20th 2019
NasdaqCM:AMEH Price Estimation Relative to Market, September 20th 2019

Its relatively high P/E ratio indicates that Apollo Medical Holdings shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Apollo Medical Holdings saw earnings per share decrease by 66% last year. But over the longer term (3 years), earnings per share have increased by 79%.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Apollo Medical Holdings's Balance Sheet

The extra options and safety that comes with Apollo Medical Holdings's US$9.3m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Apollo Medical Holdings's P/E Ratio

With a P/E ratio of 70.6, Apollo Medical Holdings is expected to grow earnings very strongly in the years to come. The recent drop in earnings per share would make some investors cautious, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What we know for sure is that investors have become much more excited about Apollo Medical Holdings recently, since they have pushed its P/E ratio from 55.1 to 70.6 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. 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.

Of course you might be able to find a better stock than Apollo Medical Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.