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A Rising Share Price Has Us Looking Closely At American Shared Hospital Services's (NYSEMKT:AMS) P/E Ratio

American Shared Hospital Services (NYSEMKT:AMS) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month alone, although it is still down 30% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 37% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for American Shared Hospital Services

How Does American Shared Hospital Services's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 15.14 that sentiment around American Shared Hospital Services isn't particularly high. If you look at the image below, you can see American Shared Hospital Services has a lower P/E than the average (22.0) in the healthcare industry classification.

AMEX:AMS Price Estimation Relative to Market April 18th 2020
AMEX:AMS Price Estimation Relative to Market April 18th 2020

American Shared Hospital Services's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

American Shared Hospital Services's earnings per share fell by 36% in the last twelve months. And it has shrunk its earnings per share by 13% per year over the last three years. This growth rate might warrant a low P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting American Shared Hospital Services's P/E?

American Shared Hospital Services has net debt equal to 28% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On American Shared Hospital Services's P/E Ratio

American Shared Hospital Services has a P/E of 15.1. That's higher than the average in its market, which is 13.6. With some debt but no EPS growth last year, the market has high expectations of future profits. What we know for sure is that investors have become more excited about American Shared Hospital Services recently, since they have pushed its P/E ratio from 11.5 to 15.1 over the last month. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than American Shared Hospital Services. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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. Thank you for reading.

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