Shareholders Should Be Pleased With Ramsay Health Care Limited's (ASX:RHC) Price

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Ramsay Health Care Limited (ASX:RHC) as a stock to avoid entirely with its 50.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings that are retreating more than the market's of late, Ramsay Health Care has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Ramsay Health Care

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ramsay Health Care.

How Is Ramsay Health Care's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ramsay Health Care's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 19%. This means it has also seen a slide in earnings over the longer-term as EPS is down 12% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 44% each year over the next three years. With the market only predicted to deliver 17% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Ramsay Health Care is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Ramsay Health Care'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.

As we suspected, our examination of Ramsay Health Care's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Ramsay Health Care you should be aware of, and 1 of them doesn't sit too well with us.

If these risks are making you reconsider your opinion on Ramsay Health Care, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.