With a price-to-earnings (or "P/E") ratio of 20x Life Healthcare Group Holdings Limited (JSE:LHC) may be sending very bearish signals at the moment, given that almost half of all companies in South Africa have P/E ratios under 10x and even P/E's lower than 6x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Life Healthcare Group Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.free report on Life Healthcare Group Holdings.
How Is Life Healthcare Group Holdings' Growth Trending?
In order to justify its P/E ratio, Life Healthcare Group Holdings would need to produce outstanding growth well in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 136% last year. As a result, it also grew EPS by 5.6% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the seven analysts watching the company. With the market only predicted to deliver 10% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Life Healthcare Group Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Life Healthcare Group Holdings' P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Life Healthcare Group Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Life Healthcare Group Holdings, and understanding should be part of your investment process.
If these risks are making you reconsider your opinion on Life Healthcare Group Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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.