With a price-to-earnings (or “P/E”) ratio of 28.9x Atari SA (EPA:ATA) may be sending very bearish signals at the moment, given that almost half of all companies in France have P/E ratios under 16x and even P/E’s lower than 9x 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 so lofty.
With earnings that are retreating more than the market’s of late, Atari has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
See our latest analysis for Atari
What Are Growth Metrics Telling Us About The High P/E?
Atari’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 5.4%. This means it has also seen a slide in earnings over the longer-term as EPS is down 74% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth will be highly resilient over the next year growing by 50%. With the rest of the market predicted to shrink by 6.5%, that would be a fantastic result.
With this information, we can see why Atari is trading at such a high P/E compared to the market. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader market going backwards.
What We Can Learn From Atari’s P/E?
Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We’ve established that Atari maintains its high P/E on the strength of its forecast growth potentially beating a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. We still remain cautious about the company’s ability to keep swimming against the current of the broader market turmoil. Although, if the company’s prospects don’t change they will continue to provide strong support to the share price.
There are also other vital risk factors to consider before investing and we’ve discovered 3 warning signs for Atari that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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