With a price-to-earnings (or "P/E") ratio of 3.6x Tenet Healthcare Corporation (NYSE:THC) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 32x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Tenet Healthcare has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Tenet Healthcare

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Is There Any Growth For Tenet Healthcare?

The only time you'd be truly comfortable seeing a P/E as depressed as Tenet Healthcare's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 449% last year. The strong recent performance means it was also able to grow EPS by 293% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 24% per year as estimated by the analysts watching the company. With the market predicted to deliver 11% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Tenet Healthcare's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Tenet Healthcare's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Tenet Healthcare's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Tenet Healthcare (of which 2 are a bit unpleasant!) you should know about.

If you're unsure about the strength of Tenet Healthcare's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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