Investors Appear Satisfied With GTN Limited's (ASX:GTN) Prospects

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider GTN Limited (ASX:GTN) as a stock to avoid entirely with its 38.3x 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.

For example, consider that GTN's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for GTN

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on GTN's earnings, revenue and cash flow.

How Is GTN's Growth Trending?

In order to justify its P/E ratio, GTN would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 804% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why GTN is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of GTN revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for GTN that we have uncovered.

Of course, you might also be able to find a better stock than GTN. 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.