The Healthcare Services Group, Inc. (NASDAQ:HCSG) share price has done very well over the last month, posting an excellent gain of 28%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 10% in the last twelve months.
Since its price has surged higher, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Healthcare Services Group as a stock to potentially avoid with its 23.5x 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.
Recent times have been pleasing for Healthcare Services Group as its earnings have risen in spite of the market's earnings going into reverse. 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.
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Healthcare Services Group's is when the company's growth is on track to outshine the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 61% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 22% per year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 10% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Healthcare Services Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Healthcare Services Group's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Healthcare Services Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Healthcare Services Group with six simple checks will allow you to discover any risks that could be an issue.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.