A Rising Share Price Has Us Looking Closely At Viemed Healthcare, Inc.’s (TSE:VMD) P/E Ratio

Viemed Healthcare (TSE:VMD) shareholders are no doubt pleased to see that the share price has had a great month, posting a 52% gain, recovering from prior weakness. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Viemed Healthcare

How Does Viemed Healthcare’s P/E Ratio Compare To Its Peers?

Viemed Healthcare’s P/E of 22.86 indicates some degree of optimism towards the stock. As you can see below, Viemed Healthcare has a higher P/E than the average company (19.2) in the healthcare industry.

TSX:VMD Price Estimation Relative to Market April 8th 2020
TSX:VMD Price Estimation Relative to Market April 8th 2020

Viemed Healthcare’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 further research is always essential. I often monitor director buying and 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. When earnings grow, the ‘E’ increases, over time. 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.

Viemed Healthcare’s earnings per share fell by 9.9% in the last twelve months. But EPS is up 91% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 32% annually. So we might expect a relatively low P/E.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

So What Does Viemed Healthcare’s Balance Sheet Tell Us?

Viemed Healthcare has net cash of US$3.8m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Viemed Healthcare’s P/E Ratio

Viemed Healthcare trades on a P/E ratio of 22.9, which is above its market average of 10.8. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What is very clear is that the market has become significantly more optimistic about Viemed Healthcare over the last month, with the P/E ratio rising from 15.1 back then to 22.9 today. 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. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Viemed Healthcare. 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.

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