What Ashtead Group plc's (LON:AHT) P/E Is Not Telling You

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 15x, you may consider Ashtead Group plc (LON:AHT) as a stock to potentially avoid with its 18.5x 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 as high as it is.

Ashtead Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Ashtead Group

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

How Is Ashtead Group's Growth Trending?

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

Retrospectively, the last year delivered a decent 4.1% gain to the company's bottom line. The latest three year period has also seen an excellent 108% overall rise in EPS, aided somewhat 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.

Turning to the outlook, the next three years should generate growth of 9.9% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 14% per annum, which is noticeably more attractive.

In light of this, it's alarming that Ashtead Group's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

Our examination of Ashtead Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Ashtead Group has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Ashtead Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (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.