Those holding Health Insurance Innovations (NASDAQ:HIIQ) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 7.8% over a quarter. But that will do little to salve the savage burn caused by the 61% share price decline, over the last year.
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. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Health Insurance Innovations's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 27.67 that there is some investor optimism about Health Insurance Innovations. You can see in the image below that the average P/E (16.3) for companies in the insurance industry is lower than Health Insurance Innovations's P/E.
That means that the market expects Health Insurance Innovations will outperform other companies in its industry. 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
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Health Insurance Innovations's earnings per share fell by 28% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 36%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Health Insurance Innovations's Debt Impact Its P/E Ratio?
Health Insurance Innovations has net debt equal to 42% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Health Insurance Innovations's P/E Ratio
Health Insurance Innovations has a P/E of 27.7. That's higher than the average in its market, which is 17.8. With some debt but no EPS growth last year, the market has high expectations of future profits. What is very clear is that the market has become significantly more optimistic about Health Insurance Innovations over the last month, with the P/E ratio rising from 20.9 back then to 27.7 today. 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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 modest (or no) debt, trading on a P/E below 20.
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 email@example.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.