McKesson shares fell by -1.7% during the day's morning session, and are now trading at a price of $357.87. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly in terms of its earnings and equity levels.
McKesson Corporation provides healthcare services in the United States and internationally. The company belongs to the Health Care sector, which has an average price to earnings (P/E) ratio of 24.45. In contrast, McKesson has a trailing 12 month P/E ratio of 16.4 based on its earnings per share of $21.78.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
