The Market Lifts Australian Clinical Labs Limited (ASX:ACL) Shares 31% But It Can Do More

Australian Clinical Labs Limited (ASX:ACL) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, it's still not a stretch to say that Australian Clinical Labs' price-to-earnings (or "P/E") ratio of 18.7x right now seems quite "middle-of-the-road" compared to the market in Australia, where the median P/E ratio is around 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

There hasn't been much to differentiate Australian Clinical Labs' and the market's earnings growth lately. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

See our latest analysis for Australian Clinical Labs

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

In order to justify its P/E ratio, Australian Clinical Labs would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 40% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 126% over the next year. Meanwhile, the rest of the market is forecast to only expand by 16%, which is noticeably less attractive.

With this information, we find it interesting that Australian Clinical Labs is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Australian Clinical Labs' P/E

Its shares have lifted substantially and now Australian Clinical Labs' P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Australian Clinical Labs' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Australian Clinical Labs (1 is potentially serious!) that you should be aware of.

You might be able to find a better investment than Australian Clinical Labs. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.