Health Insurance Innovations (NASDAQ:HIIQ) shareholders are no doubt pleased to see that the share price has had a great month, posting a 34% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 44% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). 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). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for Health Insurance Innovations
Does Health Insurance Innovations Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 30.59 that there is some investor optimism about Health Insurance Innovations. As you can see below, Health Insurance Innovations has a higher P/E than the average company (15.6) in the insurance industry.
Its relatively high P/E ratio indicates that Health Insurance Innovations 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 delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Health Insurance Innovations shrunk earnings per share by 28% over the last year. But EPS is up 36% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.