For a profitable company, the P/E ratio is a useful shorthand for what investors are currently willing to pay for each dollar of earnings. It links directly to the bottom line, which is usually the main driver of long term shareholder returns.

What counts as a “normal” P/E depends on how the market views a company’s growth prospects and risk profile. Higher expected growth or lower perceived risk often lead investors to accept a higher multiple, while slower growth or higher risk usually line up with a lower one.

HCA Healthcare currently trades on a P/E of 16.88x. That is below both the Healthcare industry average of 23.49x and the peer group average of 18.05x. Simply Wall St also calculates a proprietary “Fair Ratio” of 31.25x, which is the P/E it would expect given HCA Healthcare’s earnings growth profile, industry, profit margins, market cap and risk factors.

This Fair Ratio aims to be more tailored than a simple comparison with peers or the broader industry, because it adjusts for company specific characteristics rather than assuming all Healthcare stocks deserve similar multiples. Since the Fair Ratio of 31.25x is higher than the current P/E of 16.88x, this approach points to the shares trading at a discount to what the model suggests.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1445 companies where insiders are betting big on explosive growth.

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which are simple stories you create about HCA Healthcare that connect your view of its future revenue, earnings and margins to a financial forecast, a fair value, and then a clear comparison with today’s share price. This allows you to judge whether it looks attractive or not, all within an easy tool on Simply Wall St’s Community page that updates as new news or earnings arrive. Narratives can reflect very different viewpoints, such as one investor focusing on higher fair values around US$525 if they think Q3 strength, supplemental payments and profit margins will hold up, while another anchors closer to US$333 if they are more cautious about policy and reimbursement risks.

Do you think there’s more to the story for HCA Healthcare? Head over to our Community to see what others are saying!

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.

Companies discussed in this article include HCA.

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