Grey Wolf Animal Health Corp.’s (CVE:WOLF) Share Price Not Quite Adding Up

Grey Wolf Animal Health Corp.’s (CVE:WOLF) price-to-earnings (or “P/E”) ratio of 62.1x 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 16x and even P/E’s below 9x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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For example, consider that Grey Wolf Animal Health’s financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

See our latest analysis for Grey Wolf Animal Health

We don’t have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Grey Wolf Animal Health’s earnings, revenue and cash flow.

How Is Grey Wolf Animal Health’s Growth Trending?

In order to justify its P/E ratio, Grey Wolf Animal Health would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 17% decrease to the company’s bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it’s fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company’s recent medium-term annualised growth rates.

In light of this, it’s alarming that Grey Wolf Animal Health’s P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren’t willing to let go of their stock at any price. There’s a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Grey Wolf Animal Health’s P/E?

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.

Our examination of Grey Wolf Animal Health revealed its three-year earnings trends aren’t impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn’t likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we’ve spotted with Grey Wolf Animal Health (including 1 which makes us a bit uncomfortable).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.