Yahoo Finance Should We Worry About Metlifecare Limited's (NZSE:MET) P/E Ratio?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Metlifecare Limited's (NZSE:MET) P/E ratio and reflect on what it tells us about the company's share price. Metlifecare has a price to earnings ratio of 10.84, based on the last twelve months. That corresponds to an earnings yield of approximately 9.2%.
Check out our latest analysis for Metlifecare
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Metlifecare:
P/E of 10.84 = NZ$4.75 ÷ NZ$0.44 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Metlifecare shrunk earnings per share by 35% over the last year. But over the longer term (5 years) earnings per share have increased by 7.8%. And it has shrunk its earnings per share by 24% per year over the last three years. This growth rate might warrant a low P/E ratio.
How Does Metlifecare's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Metlifecare has a P/E ratio that is fairly close for the average for the healthcare industry, which is 10.8.
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. I inform my view byby checking management tenure and remuneration, among other things.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
So What Does Metlifecare's Balance Sheet Tell Us?
Net debt is 25% of Metlifecare's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Metlifecare's P/E Ratio
Metlifecare's P/E is 10.8 which is below average (17.8) in the NZ market. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Metlifecare may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
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. Thank you for reading.
