Earnings Tell The Story For Stealth Group Holdings Ltd (ASX:SGI) As Its Stock Soars 32%

Stealth Group Holdings Ltd (ASX:SGI) shares have continued their recent momentum with a 32% gain in the last month alone. The last month tops off a massive increase of 189% in the last year.

Since its price has surged higher, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Stealth Group Holdings as a stock to avoid entirely with its 51.3x P/E ratio. 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 growth that's superior to most other companies of late, Stealth Group Holdings has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Stealth Group Holdings

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

Is There Enough Growth For Stealth Group Holdings?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Stealth Group Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 115% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 620% per year as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 18% each year growth forecast for the broader market.

In light of this, it's understandable that Stealth Group Holdings' 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 Key Takeaway

Shares in Stealth Group Holdings have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Stealth Group Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 4 warning signs for Stealth Group Holdings (1 can't be ignored!) that you need to take into consideration.

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 low P/E.

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.