Getting In Cheap On Aristocrat Leisure Limited (ASX:ALL) Might Be Difficult

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider Aristocrat Leisure Limited (ASX:ALL) as a stock to avoid entirely with its 36.5x 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.

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Aristocrat Leisure hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Aristocrat Leisure

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

Is There Enough Growth For Aristocrat Leisure?

The only time you'd be truly comfortable seeing a P/E as steep as Aristocrat Leisure's is when the company's growth is on track to outshine the market decidedly.

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 18%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 21% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 15% per year, which is noticeably less attractive.

With this information, we can see why Aristocrat Leisure is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Aristocrat Leisure's 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Aristocrat Leisure that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.