Earnings Not Telling The Story For Eagers Automotive Limited (ASX:APE) After Shares Rise 28%

Despite an already strong run, Eagers Automotive Limited (ASX:APE) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 60% in the last year.

After such a large jump in price, Eagers Automotive may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 24.4x, since almost half of all companies in Australia have P/E ratios under 17x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

We've discovered 4 warning signs about Eagers Automotive. View them for free.

While the market has experienced earnings growth lately, Eagers Automotive's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Eagers Automotive

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Eagers Automotive.

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

Eagers Automotive's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 38% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 15% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is not materially different.

In light of this, it's curious that Eagers Automotive'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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

The large bounce in Eagers Automotive's shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Eagers Automotive 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for Eagers Automotive you should be aware of, and 1 of them is significant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.