Market Might Still Lack Some Conviction On Austin Engineering Limited (ASX:ANG) Even After 26% Share Price Boost

Austin Engineering Limited (ASX:ANG) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking further back, the 20% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, Austin Engineering may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.6x, since almost half of all companies in Australia have P/E ratios greater than 18x and even P/E's higher than 31x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Austin Engineering certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See 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.

How Is Austin Engineering's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Austin Engineering's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. Pleasingly, EPS has also lifted 203% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 14% each year as estimated by the two analysts watching the company. That's shaping up to be similar to the 16% per year growth forecast for the broader market.

With this information, we find it odd that Austin Engineering is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Austin Engineering's P/E?

Austin Engineering's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Austin Engineering's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Austin Engineering, and understanding should be part of your investment process.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.