Yahoo Finance With H2O Innovation Inc. (TSE:HEO) It Looks Like You'll Get What You Pay For
H2O Innovation Inc.'s (TSE:HEO) price-to-earnings (or "P/E") ratio of 75.9x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 11x and even P/E's below 5x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
H2O Innovation could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
See our latest analysis for H2O Innovation
Want the full picture on analyst estimates for the company? Then our free report on H2O Innovation will help you uncover what's on the horizon.
How Is H2O Innovation's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as H2O Innovation's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. 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 climb by 150% during the coming year according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 13%, which is noticeably less attractive.
In light of this, it's understandable that H2O Innovation'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
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.
As we suspected, our examination of H2O Innovation'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.
Before you take the next step, you should know about the 3 warning signs for H2O Innovation that we have uncovered.
Of course, you might also be able to find a better stock than H2O Innovation. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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.
