With a price-to-earnings (or "P/E") ratio of 26.2x Ryman Healthcare Limited (NZSE:RYM) may be sending bearish signals at the moment, given that almost half of all companies in New Zealand have P/E ratios under 21x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
Ryman Healthcare has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ryman Healthcare.
Is There Enough Growth For Ryman Healthcare?
There's an inherent assumption that a company should outperform the market for P/E ratios like Ryman Healthcare's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 26% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the five analysts watching the company. That's shaping up to be similar to the 9.4% each year growth forecast for the broader market.
In light of this, it's curious that Ryman Healthcare's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Key Takeaway
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.
Our examination of Ryman Healthcare's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Having said that, be aware Ryman Healthcare is showing 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.
If these risks are making you reconsider your opinion on Ryman Healthcare, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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