There's Reason For Concern Over Option Care Health, Inc.'s (NASDAQ:OPCH) Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Option Care Health, Inc. (NASDAQ:OPCH) as a stock to potentially avoid with its 22.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Option Care Health certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Option Care Health

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

How Is Option Care Health's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Option Care Health's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 14% as estimated by the eight analysts watching the company. That's not great when the rest of the market is expected to grow by 10%.

In light of this, it's alarming that Option Care Health's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

What We Can Learn From Option Care Health's P/E?

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.

Our examination of Option Care Health's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for Option Care Health (1 shouldn't be ignored!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Option Care Health. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.