Austin Engineering Limited's (ASX:ANG) P/E Is Still On The Mark Following 28% Share Price Bounce

Despite an already strong run, Austin Engineering Limited (ASX:ANG) shares have been powering on, with a gain of 28% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 9.9% isn't as attractive.

Following the firm bounce in price, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider Austin Engineering as a stock to avoid entirely with its 32.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Austin Engineering has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Austin Engineering

Keen to find out how analysts think Austin Engineering's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Austin Engineering?

In order to justify its P/E ratio, Austin Engineering would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 66% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 21% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 73% per annum as estimated by the lone analyst watching the company. With the market only predicted to deliver 17% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Austin Engineering's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Austin Engineering's P/E

Austin Engineering's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Austin Engineering's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions 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 1 warning sign for Austin Engineering that you should be aware of.

You might be able to find a better investment than Austin Engineering. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.