Yahoo Finance Do You Know What DaVita Inc’s (NYSE:DVA) P/E Ratio Means?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how DaVita Inc’s (NYSE:DVA) P/E ratio could help you assess the value on offer. DaVita has a P/E ratio of 19.76, based on the last twelve months. That means that at current prices, buyers pay $19.76 for every $1 in trailing yearly profits.
See our latest analysis for DaVita
How Do I Calculate DaVita’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for DaVita:
P/E of 19.76 = $69.7 ÷ $3.53 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
DaVita saw earnings per share decrease by 37% last year. But EPS is up 13% over the last 5 years.
How Does DaVita’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that DaVita has a lower P/E than the average (22.1) P/E for companies in the healthcare industry.
Its relatively low P/E ratio indicates that DaVita shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with DaVita, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does DaVita’s Debt Impact Its P/E Ratio?
DaVita’s net debt is 84% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On DaVita’s P/E Ratio
DaVita’s P/E is 19.8 which is above average (18.2) in the US market. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than DaVita. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
