The Market Doesn't Like What It Sees From Vitura Health Limited's (ASX:VIT) Earnings Yet As Shares Tumble 43%

To the annoyance of some shareholders, Vitura Health Limited (ASX:VIT) shares are down a considerable 43% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 68% share price decline.

Since its price has dipped substantially, Vitura Health may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.4x, since almost half of all companies in Australia have P/E ratios greater than 20x and even P/E's higher than 36x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

For example, consider that Vitura Health's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Vitura Health

Although there are no analyst estimates available for Vitura Health, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Vitura Health's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Vitura Health's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 9.2% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 28% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Vitura Health's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Vitura Health's P/E

Vitura Health's P/E looks about as weak as its stock price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Vitura Health maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Vitura Health (1 is a bit unpleasant) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.