On the Beach Group plc's (LON:OTB) P/E Is Still On The Mark Following 45% Share Price Bounce

On the Beach Group plc (LON:OTB) shares have continued their recent momentum with a 45% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

Since its price has surged higher, given around half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 16x, you may consider On the Beach Group as a stock to potentially avoid with its 18.7x 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.

Recent times have been advantageous for On the Beach Group as its earnings have been rising faster 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.

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Is There Enough Growth For On the Beach Group?

In order to justify its P/E ratio, On the Beach Group would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 90% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 27% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 14% each year, which is noticeably less attractive.

In light of this, it's understandable that On the Beach Group's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

On the Beach Group's P/E is getting right up there since its shares have risen strongly. 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 On the Beach Group 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for On the Beach Group you should be aware of.

If you're unsure about the strength of On the Beach Group's 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.