With a price-to-earnings (or "P/E") ratio of 44.3x Premier Health of America Inc. (CVE:PHA) may be sending very bearish signals at the moment, given that almost half of all companies in Canada have P/E ratios under 10x and even P/E's lower than 4x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
As an illustration, earnings have deteriorated at Premier Health of America over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
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Does Growth Match The High P/E?
Premier Health of America's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered a frustrating 54% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 91% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 14% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Premier Health of America is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Premier Health of America's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Premier Health of America currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.