How Does Eagle Health Holdings's (ASX:EHH) P/E Compare To Its Industry, After The Share Price Drop?
Eagle Health Holdings (ASX:EHH) shares have retraced a considerable 35% in the last month. That drop has capped off a tough year for shareholders, with the share price down 53% in that time. But shareholders who bought at the right time will be smiling, given that the stock is up 17% over the last quarter.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Check out our latest analysis for Eagle Health Holdings
Does Eagle Health Holdings Have A Relatively High Or Low P/E For Its Industry?
Eagle Health Holdings's P/E of 5.31 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Eagle Health Holdings has a lower P/E than the average (19.5) in the personal products industry classification.
Eagle Health Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Eagle Health Holdings shrunk earnings per share by 55% over the last year. And EPS is down 28% a year, over the last 3 years. This could justify a low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Eagle Health Holdings's Balance Sheet
Net debt totals just 1.2% of Eagle Health Holdings's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Bottom Line On Eagle Health Holdings's P/E Ratio
Eagle Health Holdings's P/E is 5.3 which is below average (13.4) in the AU market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Eagle Health Holdings's P/E ratio has declined from 8.2 to 5.3 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Eagle Health Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
