Why National Veterinary Care Ltd's (ASX:NVL) High P/E Ratio Isn't Necessarily A Bad Thing




  • In Business
  • 2019-06-18 22:32:17Z
  • By Simply Wall St.
 

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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 National Veterinary Care Ltd's (ASX:NVL) P/E ratio to inform your assessment of the investment opportunity. What is National Veterinary Care's P/E ratio? Well, based on the last twelve months it is 21.96. That corresponds to an earnings yield of approximately 4.6%.

View our latest analysis for National Veterinary Care

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for National Veterinary Care:

P/E of 21.96 = A$2.02 ÷ A$0.092 (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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

National Veterinary Care maintained roughly steady earnings over the last twelve months.

Does National Veterinary Care Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (17) for companies in the healthcare industry is lower than National Veterinary Care's P/E.

Its relatively high P/E ratio indicates that National Veterinary Care shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

So What Does National Veterinary Care's Balance Sheet Tell Us?

National Veterinary Care's net debt equates to 29% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On National Veterinary Care's P/E Ratio

National Veterinary Care's P/E is 22 which is above average (16.2) in the AU market. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.

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