When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 15x, you may consider Spire Healthcare Group plc (LON:SPI) as a stock to avoid entirely with its 47.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
While the market has experienced earnings growth lately, Spire Healthcare Group's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
View our latest analysis for Spire Healthcare Group
How Is Spire Healthcare Group's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Spire Healthcare Group's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 34%. Still, the latest three year period has seen an excellent 175% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 66% each year over the next three years. That's shaping up to be materially higher than the 15% per year growth forecast for the broader market.
In light of this, it's understandable that Spire Healthcare Group's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Spire Healthcare Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
Having said that, be aware Spire Healthcare Group is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.
If you're unsure about the strength of Spire Healthcare Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.