Electromed, Inc.'s (NYSEMKT:ELMD) 27% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/E Ratio

The Electromed, Inc. (NYSEMKT:ELMD) share price has fared very poorly over the last month, falling by a substantial 27%. Still, a bad month hasn't completely ruined the past year with the stock gaining 66%, which is great even in a bull market.

In spite of the heavy fall in price, Electromed may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.8x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Electromed 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Electromed

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Electromed.

Is There Enough Growth For Electromed?

In order to justify its P/E ratio, Electromed would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 107% last year. Pleasingly, EPS has also lifted 81% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 72% during the coming year according to the sole analyst following the company. Meanwhile, the broader market is forecast to expand by 5.4%, which paints a poor picture.

In light of this, it's alarming that Electromed's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Final Word

There's still some solid strength behind Electromed's P/E, if not its share price lately. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Electromed currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Electromed (of which 1 is concerning!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

This article by Simply Wall St is general in nature. 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.

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