Some Shareholders Feeling Restless Over Qube Holdings Limited's (ASX:QUB) P/E Ratio

With a price-to-earnings (or "P/E") ratio of 31.9x Qube Holdings Limited (ASX:QUB) may be sending very bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 18x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Qube Holdings has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Qube Holdings

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How Is Qube Holdings' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Qube Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. The latest three year period has also seen an excellent 99% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 17% each year, which is noticeably more attractive.

With this information, we find it concerning that Qube Holdings is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

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 Qube Holdings currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Qube Holdings is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Qube Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.