Is Inovalon Holdings Inc (NASDAQ:INOV) A Sell At Its Current PE Ratio?

INOV is currently trading at an extremely high trailing PE of 103x, more than 2.29 times above the Healthcare Services’s average of 45.12x. Yes, this excessive multiple can initially be deterring, but there are many company-specific elements which are not captured in such a static ratio – such as its growth outlook and debt obligations. Below, I will lay out some important considerations to help determine which multiple best suits the fast-growing company, INOV. Let’s take a look below.

How much does INOV earn?

The PE multiple is useful for when a company is profitable, which is the case with INOV. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. In this case, investors can use other useful tools like price-to-sales or price-to-book where appropriate. Historically, INOV has always managed to produce positive profits for investors. But forecasts suggest negative earnings moving forward, therefore other multiples may need to be considered for relative valuation.

NasdaqGS:INOV Future Profit June 23rd 18
NasdaqGS:INOV Future Profit June 23rd 18

Is INOV in a lot of debt?

INOV has debt on the balance sheet, but at a level below what would generally call for concern. Currently, ’s debt represents 38.30% of equity, meaning that for every $1 you invest, the company owes $0.38 to debtors. This is a suitable range, however, risk associated with debt obligation still exists, as with any company with debt on the books. This isn’t an alarming amount, but investors should still proceed with caution.

NasdaqGS:INOV Historical Debt June 23rd 18
NasdaqGS:INOV Historical Debt June 23rd 18
Debt levels matter when valuing the business because in theory INOV’s share price represents the equity portion only, but its important to account for debt, as using leverage alters the capital structure, and influences the risk and performance of the business. This can be done using enterprise value (EV) instead of share price. EV adds in debt and subtracts cash in order to recognise both sources of funding and is commonly used in the EV/EBITDA multiple.

INOV’s EV/EBITDA = US$1.35b / US$0 = 24.3x

INOV’s multiple appears appropriately valued relative to the industry’s average of 24.3x, in contrast to the price-to-earnings multiple which suggested the company was selling at a premium to fair value.

Does INOV have a fast-growing outlook?

According to industry analyst consensus of earnings estimates, the bottom line is expected to grow by 80.05% every year for the next 5 years. This gives INOV an extremely high growth outlook. However, current earnings don’t reflect any of this potential growth, which is a limitation for using past (or “trailing”) values of EBITDA. Buying a stock means you’re entitled to future earnings, not the past. Therefore, it’s more useful to focus on what you’ll receive. To account for this growth we can use the one-year analyst-consensus future EBITDA (this is a “forward” multiple).

INOV’s forward EV/EBITDA = US$1.35b /US$168.94m = 8.01x

INOV is undervalued when comparing its multiple to the 16.1x industry average. which differs from the fair market value INOV’s past EV/EBITDA ratio suggested.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ‘s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.