A Sliding Share Price Has Us Looking At National HealthCare Corporation's (NYSEMKT:NHC) P/E Ratio
Unfortunately for some shareholders, the National HealthCare (NYSEMKT:NHC) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 29% in the last year.
All else being equal, a share price drop should make a stock more 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.
See our latest analysis for National HealthCare
How Does National HealthCare's P/E Ratio Compare To Its Peers?
National HealthCare's P/E of 12.75 indicates relatively low sentiment towards the stock. The image below shows that National HealthCare has a lower P/E than the average (16.9) P/E for companies in the healthcare industry.
National HealthCare's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with National HealthCare, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's great to see that National HealthCare grew EPS by 15% in the last year. And its annual EPS growth rate over 5 years is 6.7%. So one might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
National HealthCare's Balance Sheet
National HealthCare has net cash of US$193m. This is fairly high at 22% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On National HealthCare's P/E Ratio
National HealthCare has a P/E of 12.8. That's around the same as the average in the US market, which is 12.7. Considering its recent growth, alongside its lack of debt, it would appear that the market isn't very excited about the future. Given National HealthCare's P/E ratio has declined from 18.5 to 12.8 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than National HealthCare. 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.
