Crestchic Plc (LON:LOAD) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.
After such a large jump in price, given close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 13x, you may consider Crestchic as a stock to avoid entirely with its 36.8x 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.
Crestchic certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.free report is a great place to start.
Does Growth Match The High P/E?
Crestchic's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 140%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next three years should generate growth of 33% per annum as estimated by the three analysts watching the company. With the market only predicted to deliver 11% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why Crestchic is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Crestchic's P/E is flying high just like its stock has during the last month. 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 Crestchic maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Crestchic you should know about.
You might be able to find a better investment than Crestchic. 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).
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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.
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