With a price-to-earnings (or “P/E”) ratio of 16x Alpha Pro Tech, Ltd. (NYSEMKT:APT) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E’s higher than 38x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s limited.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Alpha Pro Tech has been doing quite well of late. One possibility is that the P/E is low because investors think the company’s earnings are going to fall away like everyone else’s soon. 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 Alpha Pro Tech
Is There Any Growth For Alpha Pro Tech?
There’s an inherent assumption that a company should underperform the market for P/E ratios like Alpha Pro Tech’s to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 188% last year. The latest three year period has also seen an excellent 355% overall rise in EPS, aided by its short-term performance. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 122% as estimated by the one analyst watching the company. That’s shaping up to be materially higher than the 4.4% growth forecast for the broader market.
In light of this, it’s peculiar that Alpha Pro Tech’s P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Key Takeaway
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.
We’ve established that Alpha Pro Tech currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
You always need to take note of risks, for example – Alpha Pro Tech has 2 warning signs we think you should be aware of.
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 P/E below 20x.
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This article by Simply Wall St is general in nature. 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.
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