Take Care Before Diving Into The Deep End On Universal Health Services, Inc. (NYSE:UHS)
Universal Health Services, Inc.'s (NYSE:UHS) price-to-earnings (or "P/E") ratio of 13.4x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 37x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
There hasn't been much to differentiate Universal Health Services' and the market's retreating earnings lately. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.
See our latest analysis for Universal Health Services
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Universal Health Services.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Universal Health Services would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.2%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 15% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 12% per annum during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 13% each year, which is not materially different.
With this information, we find it odd that Universal Health Services is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Universal Health Services currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Universal Health Services that you need to be mindful of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
