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What Does Addus HomeCare Corporation’s (NASDAQ:ADUS) PE Ratio Tell You?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.

Addus HomeCare Corporation (NASDAQ:ADUS) is currently trading at a trailing P/E of 43.8x, which is higher than the industry average of 23.7x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

See our latest analysis for Addus HomeCare

What you need to know about the P/E ratio

NasdaqGS:ADUS PE PEG Gauge August 20th 18
NasdaqGS:ADUS PE PEG Gauge August 20th 18

The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for ADUS

Price-Earnings Ratio = Price per share ÷ Earnings per share

ADUS Price-Earnings Ratio = $59.6 ÷ $1.361 = 43.8x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ADUS, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since ADUS’s P/E of 43.8x is higher than its industry peers (23.7x), it means that investors are paying more than they should for each dollar of ADUS’s earnings. This multiple is a median of profitable companies of 25 Healthcare companies in US including LifeHOUSE Holdings, ALL-Q-TELL and Agility Health. Therefore, according to this analysis, ADUS is an over-priced stock.

Assumptions to be aware of

While our conclusion might prompt you to sell your ADUS shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ADUS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with ADUS, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing ADUS to are fairly valued by the market. If this is violated, ADUS’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

Since you may have already conducted your due diligence on ADUS, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ADUS’s future growth? Take a look at our free research report of analyst consensus for ADUS’s outlook.

  2. Past Track Record: Has ADUS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ADUS’s historicals for more clarity.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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