Market Might Still Lack Some Conviction On ADF Group Inc. (TSE:DRX) Even After 27% Share Price Boost

ADF Group Inc. (TSE:DRX) shares have continued their recent momentum with a 27% gain in the last month alone. This latest share price bounce rounds out a remarkable 339% gain over the last twelve months.

Even after such a large jump in price, ADF Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.9x, since almost half of all companies in Canada have P/E ratios greater than 14x and even P/E's higher than 27x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for ADF Group as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for ADF Group

Keen to find out how analysts think ADF Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is ADF Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as ADF Group's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 119% last year. The latest three year period has also seen an excellent 533% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 19% during the coming year according to the lone analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 17%, which is noticeably less attractive.

In light of this, it's peculiar that ADF Group's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From ADF Group's P/E?

Despite ADF Group's shares building up a head of steam, its P/E still lags most other companies. 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.

Our examination of ADF Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for ADF Group with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on ADF Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.