The Price Is Right For Spire Healthcare Group plc (LON:SPI) Even After Diving 26%
Spire Healthcare Group plc (LON:SPI) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.
Even after such a large drop in price, Spire Healthcare Group may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 36.5x, since almost half of all companies in the United Kingdom have P/E ratios under 15x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Spire Healthcare Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Spire Healthcare Group
Is There Enough Growth For Spire Healthcare Group?
The only time you'd be truly comfortable seeing a P/E as steep as Spire Healthcare Group's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 34%. Still, the latest three year period has seen an excellent 175% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 63% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 16% per year, which is noticeably less attractive.
With this information, we can see why Spire Healthcare Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Spire Healthcare Group's P/E?
Even after such a strong price drop, Spire Healthcare Group's P/E still exceeds the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Spire Healthcare Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Spire Healthcare Group (of which 1 is potentially serious!) you should know about.
You might be able to find a better investment than Spire Healthcare Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.