The Pro Medicus Ltd (ASX: PME) share price has fallen just over 20% from its recent peak on 19 February 2025, as the chart below shows. Plenty of ASX growth shares have also suffered double-digit declines in recent weeks, but it's worth asking the question of whether the ASX healthcare share is an opportunity at this lower price.
Before diving into analysing the business, I'd say Pro Medicus is arguably the best business on the ASX. Its high price-earnings (P/E) ratio has been very high for a long time – it still is. It's currently valued at 296x FY24's earnings.
I recently decided to make a relatively small investment into Pro Medicus shares after the heavy decline.
It's a possibility the Pro Medicus share price could fall further from here, but I decided to take the plunge and buy a small number of shares – despite the triple-digit P/E ratio – for a few key reasons beyond the valuation decline.
Stronger profit margins
I've always been impressed by the profit margins the company has achieved, with both its gross profit margin and the operating profit (EBIT) margin.
The business positively surprised me when it reported its FY25 half-year result by stating how strong its EBIT margin had become. I think this bodes well for further EBIT margin growth in the coming years as it adds revenue to its financials from newly won contracts.
The company revealed the EBIT margin grew from 66% in HY24 to 71.9% in HY25. Considering the EBIT margin was already extremely high, this level of improvement was exceptional.
Pro Medicus has won a number of new contracts in recent times and I think it could win further contracts in the US and beyond in the coming years.
Additional growth avenues
The company has achieved an excellent (and growing) position in the radiology software space in North America. I think the company has a very promising growth outlook in this area in the coming years.
Pro Medicus is doing work on both AI and other 'ologies', which I think could help diversify and grow the company's earnings further. When asked about these two areas, the Pro Medicus CEO Sam Hupert said in an interview (which was released to the ASX):
We have continued to make good progress on both fronts. We showed some of our new 'work in progress' AI projects at RSNA in December and received very positive feedback. We have also continued to make progress with our cardiology offering and have signed our first contract for our new cardiac echo-package, which we are looking to implement in the April timeframe. Whilst the contract is with one of our smaller customers, we see this as a material first step.
Potential profit growth
The valuation of ASX shares is usually influenced by how much profit investors think the business will make in the coming years. Given the high Pro Medicus share price, the market is clearly expecting a lot from the company.
It's true that the business is trading at a very high level for how much profit it made in FY24. But, profit could keep rising at a fast pace over the rest of the decade, making today's valuation seem less expensive.
For example, in the first half of FY25, the company grew its net profit after tax (NPAT) by 42.7%.
The business has signed a number of contracts that should help its profit rise in the coming years. In November 2024, it signed a 10-year contract with Trinity Health (one of the largest not-for-profit healthcare systems in the US) for A$330 million. It has signed a number of smaller contracts since then too.
If the EBIT margin rises even further, then this additional revenue could become increasingly valuable for Pro Medicus shares.
