Green Cross Health Limited's (NZSE:GXH) Earnings Are Not Doing Enough For Some Investors

With a price-to-earnings (or "P/E") ratio of 8.8x Green Cross Health Limited (NZSE:GXH) may be sending very bullish signals at the moment, given that almost half of all companies in New Zealand have P/E ratios greater than 20x and even P/E's higher than 32x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Recent times have been quite advantageous for Green Cross Health as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Green Cross Health

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Green Cross Health's earnings, revenue and cash flow.

How Is Green Cross Health's Growth Trending?

In order to justify its P/E ratio, Green Cross Health would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 21% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 18% shows it's an unpleasant look.

In light of this, it's understandable that Green Cross Health's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Green Cross Health's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Green Cross Health revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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 moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Green Cross Health (1 is potentially serious!) that you should be aware of before investing here.

If you're unsure about the strength of Green Cross Health's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.