With a price-to-earnings (or "P/E") ratio of 31.8x Cardinal Health, Inc. (NYSE:CAH) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Recent times have been pleasing for Cardinal Health as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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Is There Enough Growth For Cardinal Health?
Cardinal Health's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 175% last year. The strong recent performance means it was also able to grow EPS by 68% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 31% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 10% per annum, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Cardinal Health'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
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Cardinal Health'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. Unless these conditions change, they will continue to provide strong support to the share price.
Having said that, be aware Cardinal Health is showing 4 warning signs in our investment analysis, you should know about.
If you're unsure about the strength of Cardinal Health's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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以31.8倍的市盈率(Cardinal Health, Inc. 纽交所:CAH)目前可能传递非常消极的信号,因为在美国,将近一半的公司的市盈率低于18倍,甚至低于10倍的市盈率不飞凡。然而,仅仅凭市盈率就做决定并不明智,因为可能有解释为何市盈率如此之高。