When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Option Care Health, Inc. (NASDAQ:OPCH) as a stock to potentially avoid with its 21x P/E ratio.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.  

With its earnings growth in positive territory compared to the declining earnings of most other companies, Option Care Health has been doing quite well of late.   It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

NasdaqGS:OPCH Price to Earnings Ratio vs Industry March 11th 2024

Keen to find out how analysts think Option Care Health's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Option Care Health's Growth Trending?  

Option Care Health's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.  

Taking a look back first, we see that the company grew earnings per share by an impressive 80% last year.    Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall.  So it appears to us that the company has had a mixed result in terms of growing earnings over that time.  

Looking ahead now, EPS is anticipated to slump, contracting by 0.5% each year during the coming three years according to the eight analysts following the company.  That's not great when the rest of the market is expected to grow by 11% each year.

In light of this, it's alarming that Option Care Health's P/E sits above the majority of other companies.  It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen.  There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.  

What We Can Learn From Option Care Health's P/E?

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 Option Care Health currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline.  Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long.  Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.    

We don't want to rain on the parade too much, but we did also find 3 warning signs for Option Care Health (1 can't be ignored!) that you need to be mindful of.  

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.