Azure Healthcare Limited (ASX:AZV) shareholders have had their patience rewarded with a 30% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 26%.
Although its price has surged higher, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may still consider Azure Healthcare as a highly attractive investment with its 9.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Recent times have been quite advantageous for Azure Healthcare as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Azure Healthcare's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Azure Healthcare's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 245% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Azure Healthcare is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From Azure Healthcare's P/E?
Shares in Azure Healthcare are going to need a lot more upward momentum to get the company's P/E out of its slump. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Azure Healthcare maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware Azure Healthcare is showing 3 warning signs in our investment analysis, you should know about.
Of course, you might also be able to find a better stock than Azure Healthcare. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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