When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider DaVita Inc. (NYSE:DVA) as an attractive investment with its 15.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for DaVita as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is DaVita's Growth Trending?

In order to justify its P/E ratio, DaVita would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 45% last year. As a result, it also grew EPS by 11% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 12% per annum as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is not materially different.

With this information, we find it odd that DaVita is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From DaVita's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that DaVita currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 1 warning sign for DaVita that you need to take into consideration.

If you're unsure about the strength of DaVita's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.