The Apollo Medical Holdings (NASDAQ:AMEH) share price has done well in the last month, posting a gain of 28%. And the full year gain of 22% isn't too shabby, either!
All else being equal, a sharp share price increase should make a stock less 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock 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 Apollo Medical Holdings
How Does Apollo Medical Holdings's P/E Ratio Compare To Its Peers?
Apollo Medical Holdings's P/E of 70.62 indicates some degree of optimism towards the stock. The image below shows that Apollo Medical Holdings has a significantly higher P/E than the average (20.3) P/E for companies in the healthcare industry.
Its relatively high P/E ratio indicates that Apollo Medical Holdings shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Apollo Medical Holdings saw earnings per share decrease by 66% last year. But over the longer term (3 years), earnings per share have increased by 79%.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
Apollo Medical Holdings's Balance Sheet
The extra options and safety that comes with Apollo Medical Holdings's US$9.3m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.