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Does Metlifecare Limited (NZSE:MET) Have A Good P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Metlifecare Limited’s (NZSE:MET) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Metlifecare’s P/E ratio is 9.69. In other words, at today’s prices, investors are paying NZ$9.69 for every NZ$1 in prior year profit.

View our latest analysis for Metlifecare

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

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Or for Metlifecare:

P/E of 9.69 = NZ$5.7 ÷ NZ$0.59 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each NZ$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. 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.

Metlifecare’s earnings per share fell by 50% in the last twelve months. But EPS is up 17% over the last 5 years. And it has shrunk its earnings per share by 4.7% per year over the last three years. This growth rate might warrant a low P/E ratio. This could justify a low P/E.

How Does Metlifecare’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (9.7) for companies in the healthcare industry is roughly the same as Metlifecare’s P/E.

NZSE:MET PE PEG Gauge November 6th 18
NZSE:MET PE PEG Gauge November 6th 18

Its P/E ratio suggests that Metlifecare shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.

Remember: P/E Ratios Don’t Consider The Balance Sheet

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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.

Metlifecare’s Balance Sheet

Metlifecare’s net debt is 11% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Metlifecare’s P/E Ratio

Metlifecare’s P/E is 9.7 which is below average (16.5) in the NZ market. Since it only carries a modest debt load, it’s likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.

Investors have an opportunity when market expectations about a stock are wrong. 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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Metlifecare. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.