Electromed, Inc. (NYSEMKT:ELMD) shares have had a horrible month, losing 38% after a relatively good period beforehand. Still, a bad month hasn’t completely ruined the past year with the stock gaining 63%, which is great even in a bull market.
Even after such a large drop in price, Electromed’s price-to-earnings (or “P/E”) ratio of 21x might still make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E’s below 9x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Recent times have been pleasing for Electromed as its earnings have risen in spite of the market’s earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.free report is a great place to start.
What Are Growth Metrics Telling Us About The High P/E?
Electromed’s P/E ratio would be typical for a company that’s expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 107%. The latest three year period has also seen an excellent 81% overall rise in EPS, aided by its short-term performance. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 72% during the coming year according to the lone analyst following the company. Meanwhile, the broader market is forecast to expand by 5.4%, which paints a poor picture.
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. There’s a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
What We Can Learn From Electromed’s P/E?
There’s still some solid strength behind Electromed’s P/E, if not its share price lately. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We’ve established that Electromed currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
Don’t forget that there may be other risks. For instance, we’ve identified 4 warning signs for Electromed (1 makes us a bit uncomfortable) you should be aware of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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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