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A Rising Share Price Has Us Looking Closely At Apollo Medical Holdings, Inc.'s (NASDAQ:AMEH) P/E Ratio

Simply Wall St
·4 mins read

Apollo Medical Holdings (NASDAQ:AMEH) shareholders are no doubt pleased to see that the share price has bounced 55% in the last month alone, although it is still down 20% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 22% 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). 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.

Check out our latest analysis for Apollo Medical Holdings

Does Apollo Medical Holdings Have A Relatively High Or Low P/E For Its Industry?

Apollo Medical Holdings's P/E of 36.46 indicates some degree of optimism towards the stock. The image below shows that Apollo Medical Holdings has a higher P/E than the average (21.7) P/E for companies in the healthcare industry.

NasdaqCM:AMEH Price Estimation Relative to Market April 15th 2020
NasdaqCM:AMEH Price Estimation Relative to Market April 15th 2020

That means that the market expects Apollo Medical Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Most would be impressed by Apollo Medical Holdings earnings growth of 23% in the last year. Unfortunately, earnings per share are down 4.3% a year, over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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).

Apollo Medical Holdings's Balance Sheet

Net debt totals just 4.2% of Apollo Medical Holdings's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Apollo Medical Holdings's P/E Ratio

Apollo Medical Holdings trades on a P/E ratio of 36.5, which is above its market average of 13.7. Its debt levels do not imperil its balance sheet and it is growing EPS strongly. So on this analysis it seems reasonable that its P/E ratio is above average. What we know for sure is that investors have become much more excited about Apollo Medical Holdings recently, since they have pushed its P/E ratio from 23.5 to 36.5 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Apollo Medical Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.