A Rising Share Price Has Us Looking Closely At Health Insurance Innovations, Inc.'s (NASDAQ:HIIQ) P/E Ratio
Health Insurance Innovations (NASDAQ:HIIQ) shares have had a really impressive month, gaining 39%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 33% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Health Insurance Innovations
Does Health Insurance Innovations Have A Relatively High Or Low P/E For Its Industry?
Health Insurance Innovations's P/E of 22.04 indicates some degree of optimism towards the stock. The image below shows that Health Insurance Innovations has a higher P/E than the average (15.6) P/E for companies in the insurance industry.
Health Insurance Innovations's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's nice to see that Health Insurance Innovations grew EPS by a stonking 26% in the last year. And its annual EPS growth rate over 3 years is 23%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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 43% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Health Insurance Innovations's P/E Ratio
Health Insurance Innovations's P/E is 22.0 which is above average (18.6) in its market. While the company does use modest debt, its recent earnings growth is very good. Therefore, it's not particularly surprising that it has a above average P/E ratio. What we know for sure is that investors have become much more excited about Health Insurance Innovations recently, since they have pushed its P/E ratio from 15.8 to 22.0 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Health Insurance Innovations may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
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