Is Ramsay Health Care Limited a buy at this share price?

What: Shares in Ramsay Health Care Limited (ASX: RHC) have traded higher on Wednesday morning despite the company announcing that it has decided not to proceed with its proposed joint venture in Chengdu, China.

Ramsay cited “a number of threshold conditions precedent not being satisfied” in explaining its decision not to proceed.

So What: According to the group’s recently released half-year results presentation, Ramsay is ranked in the top five private hospital operators in the world with 221 hospitals across six countries including Australia, The United Kingdom, France, Malaysia and Indonesia.

Given the size of China’s population and the potential for expanding its private hospital base, the country is an obvious target for Ramsay.

While today’s announcement is perhaps a set-back, in the long run getting the entry into China right is much more important.

For this reason, Ramsay’s cautious approach to utilising shareholders’ funds should be congratulated.

Now What: Management has already noted that Asia presents an exciting opportunity for the company and no doubt China remains a key plank in that strategy.

Even without exposure to China however, the group is forecasting 15% to 17% growth in profits for the 2016 financial year.

Impressive growth rates such as these aren’t new for Ramsay with the group having a long history of growing its business.

This track record has led to the stock trading at a significant premium to the market. Based on management’s guidance, the stock is currently on a forward price-to-earnings ratio of approximately 30 times.

That’s a high multiple and so investors do need to be cautious, however, should Ramsay continue to achieve solid growth rates in the future then the premium will most likely turn out to be justified.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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