The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). Well apply a basic P/E ratio analysis to Oceania Healthcare Limiteds (NZSE:OCA), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Oceania Healthcare has a P/E ratio of 15.59. In other words, at todays prices, investors are paying NZ$15.59 for every NZ$1 in prior year profit.
Check out our latest analysis for Oceania Healthcare
The formula for price to earnings is:
Price to Earnings Ratio = Share Price Earnings per Share (EPS)
Or for Oceania Healthcare:
P/E of 15.59 = NZ$1.17 NZ$0.08 (Based on the year to May 2019.)
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, its better to pay a low price but as Warren Buffett said, Its far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (18.0) for companies in the healthcare industry is higher than Oceania Healthcares P/E.
Oceania Healthcares P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
When earnings fall, the E decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Oceania Healthcare saw earnings per share decrease by 41% last year. And EPS is down 20% a year, over the last 3 years. This might lead to low expectations.
Dont forget that the P/E ratio considers market capitalization. So it wont reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesnt always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Oceania Healthcare has net debt equal to 34% of its market cap. Youd want to be aware of this fact, but it doesnt bother us.
Oceania Healthcares P/E is 15.6 which is below average (19.4) in the NZ market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
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.
Of course you might be able to find a better stock than Oceania Healthcare. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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. Thank you for reading.
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