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Is NMC Health Plc (LON:NMC) A Sell At Its Current PE Ratio?

NMC Health Plc (LSE:NMC) is currently trading at a trailing P/E of 51.7x, which is higher than the industry average of 48x. While NMC might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for NMC Health

Breaking down the Price-Earnings ratio

LSE:NMC PE PEG Gauge Mar 14th 18
LSE:NMC PE PEG Gauge Mar 14th 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each pound of the company’s earnings.

P/E Calculation for NMC

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

NMC Price-Earnings Ratio = $47.03 ÷ $0.91 = 51.7x

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 NMC, 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. NMC’s P/E of 51.7x is higher than its industry peers (48x), which implies that each dollar of NMC’s earnings is being overvalued by investors. As such, our analysis shows that NMC represents an over-priced stock.

Assumptions to be aware of

However, before you rush out to sell your NMC shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to NMC, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with NMC, 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 NMC to are fairly valued by the market. If this does not hold true, NMC’s lower P/E ratio may be because firms in our peer group are overvalued by the market.


To help readers see pass 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.

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