When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider Steadfast Group Limited (ASX:SDF) as a stock to avoid entirely with its 30.3x 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.
Steadfast Group's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
See our latest analysis for Steadfast Group
How Is Steadfast Group's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Steadfast Group's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a decent 8.2% gain to the company's bottom line. EPS has also lifted 7.7% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the ten analysts watching the company. That's shaping up to be similar to the 15% per annum growth forecast for the broader market.
In light of this, it's curious that Steadfast Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
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.
We've established that Steadfast Group currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you take the next step, you should know about the 3 warning signs for Steadfast Group that we have uncovered.
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.