When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may consider Stingray Group Inc. (TSE:RAY.A) as a stock to potentially avoid with its 21.6x 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 lofty.
While the market has experienced earnings growth lately, Stingray Group's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Stingray Group
Is There Enough Growth For Stingray Group?
The only time you'd be truly comfortable seeing a P/E as high as Stingray Group's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 3.6% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 679% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.
Turning to the outlook, the next year should generate growth of 93% as estimated by the seven analysts watching the company. With the market only predicted to deliver 22%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Stingray Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
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 Stingray Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 3 warning signs for Stingray Group you should be aware of.
You might be able to find a better investment than Stingray Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
Promoted
When trading Stingray Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.