Investors Still Aren't Entirely Convinced By Third Age Health Services Limited's (NZSE:TAH) Earnings Despite 26% Price Jump

Third Age Health Services Limited (NZSE:TAH) shareholders have had their patience rewarded with a 26% share price jump in the last month. The annual gain comes to 148% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Third Age Health Services' P/E ratio of 20.4x, since the median price-to-earnings (or "P/E") ratio in New Zealand is also close to 20x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Recent times have been quite advantageous for Third Age Health Services as its earnings have been rising very briskly. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform 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 not quite in favour.

View our latest analysis for Third Age Health Services

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 Third Age Health Services' earnings, revenue and cash flow.

How Is Third Age Health Services' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Third Age Health Services' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 230% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 16% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Third Age Health Services' P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Third Age Health Services' P/E

Third Age Health Services' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Third Age Health Services currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Plus, you should also learn about this 1 warning sign we've spotted with Third Age Health Services.

You might be able to find a better investment than Third Age Health Services. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.