Some Confidence Is Lacking In Addus HomeCare Corporation's (NASDAQ:ADUS) P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Addus HomeCare Corporation (NASDAQ:ADUS) as a stock to avoid entirely with its 34.4x 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.

Recent times have been pleasing for Addus HomeCare as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Addus HomeCare

Keen to find out how analysts think Addus HomeCare's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Addus HomeCare?

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

If we review the last year of earnings growth, the company posted a terrific increase of 27%. The latest three year period has also seen an excellent 59% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 11% as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15%, which is noticeably more attractive.

With this information, we find it concerning that Addus HomeCare is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

Our examination of Addus HomeCare's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Addus HomeCare that you should be aware of.

You might be able to find a better investment than Addus HomeCare. 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.