Australian Agricultural Projects Ltd (ASX:AAP) Held Back By Insufficient Growth Even After Shares Climb 30%

Australian Agricultural Projects Ltd (ASX:AAP) shares have continued their recent momentum with a 30% gain in the last month alone. The annual gain comes to 140% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Australian Agricultural Projects' price-to-earnings (or "P/E") ratio of 14.1x might still make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 21x and even P/E's above 36x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Australian Agricultural Projects as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Australian Agricultural Projects

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Australian Agricultural Projects will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Australian Agricultural Projects' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 112%. The latest three year period has also seen a 6.1% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Australian Agricultural Projects is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Australian Agricultural Projects' P/E

Australian Agricultural Projects' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Australian Agricultural Projects maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 5 warning signs for Australian Agricultural Projects (1 is concerning!) that we have uncovered.

Of course, you might also be able to find a better stock than Australian Agricultural Projects. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.