Electromed, Inc.’s (NYSEMKT:ELMD) Risks Elevated At These Prices

With a price-to-earnings (or “P/E”) ratio of 24.7x Electromed, Inc. (NYSEMKT:ELMD) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E’s lower than 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Electromed has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Electromed

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AMEX:ELMD Price Based on Past Earnings September 3rd 2020
If you’d like to see what analysts are forecasting going forward, you should check out our free report on Electromed.

Is There Enough Growth For Electromed?

The only time you’d be truly comfortable seeing a P/E as high as Electromed’s is when the company’s growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 107%. The strong recent performance means it was also able to grow EPS by 81% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 72% during the coming year according to the only analyst following the company. With the market predicted to deliver 5.2% growth , that’s a disappointing outcome.

In light of this, it’s alarming that Electromed’s P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Bottom Line On Electromed’s P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.

Our examination of Electromed’s analyst forecasts revealed that its outlook for shrinking earnings isn’t impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Electromed (1 doesn’t sit too well with us!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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