What You Can Learn From The Pennant Group, Inc.'s (NASDAQ:PNTG) P/E
When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider The Pennant Group, Inc. (NASDAQ:PNTG) as a stock to avoid entirely with its 72.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Pennant Group as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Pennant Group
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pennant Group.
Is There Enough Growth For Pennant Group?
The only time you'd be truly comfortable seeing a P/E as steep as Pennant Group's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 224% gain to the company's bottom line. The latest three year period has also seen an excellent 38% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 23% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 14% each year, which is noticeably less attractive.
With this information, we can see why Pennant Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Pennant Group's P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Pennant Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Having said that, be aware Pennant Group is showing 1 warning sign in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Pennant Group, 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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