With a price-to-earnings (or "P/E") ratio of 20.3x Aquis Exchange PLC (LON:AQX) may be sending bearish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios under 17x and even P/E's lower than 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Aquis Exchange as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Aquis Exchange
How Is Aquis Exchange's Growth Trending?
In order to justify its P/E ratio, Aquis Exchange would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. The latest three year period has also seen an excellent 444% 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 5.5% per annum as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 15% per year growth forecast for the broader market.
With this information, we find it concerning that Aquis Exchange is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Aquis Exchange'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.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Aquis Exchange you should know about.
Of course, you might also be able to find a better stock than Aquis Exchange. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
About AIM:AQX
Flawless balance sheet and slightly overvalued.
