How Does RadNet's (NASDAQ:RDNT) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, RadNet (NASDAQ:RDNT) shares are down a considerable 54% in the last month. Even longer term holders have taken a real hit with the stock declining 25% in the last year.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for RadNet

Does RadNet Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 31.41 that there is some investor optimism about RadNet. The image below shows that RadNet has a higher P/E than the average (19.4) P/E for companies in the healthcare industry.

NasdaqGM:RDNT Price Estimation Relative to Market March 29th 2020
NasdaqGM:RDNT Price Estimation Relative to Market March 29th 2020

Its relatively high P/E ratio indicates that RadNet shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

RadNet's earnings per share fell by 56% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 55%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

RadNet's Balance Sheet

RadNet's net debt is considerable, at 138% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On RadNet's P/E Ratio

RadNet has a P/E of 31.4. That's higher than the average in its market, which is 13.0. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. Given RadNet's P/E ratio has declined from 68.8 to 31.4 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than RadNet. 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.