FRP Advisory Group plc (LON:FRP) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

FRP Advisory Group plc (LON:FRP) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Although its price has surged higher, it's still not a stretch to say that FRP Advisory Group's price-to-earnings (or "P/E") ratio of 17.5x right now seems quite "middle-of-the-road" compared to the market in the United Kingdom, where the median P/E ratio is around 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for FRP Advisory Group as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for FRP Advisory Group

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Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like FRP Advisory Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. The latest three year period has also seen an excellent 57% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 3.9% per year over the next three years. That's shaping up to be materially lower than the 14% each year growth forecast for the broader market.

In light of this, it's curious that FRP Advisory Group's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Its shares have lifted substantially and now FRP Advisory Group's P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of FRP Advisory Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for FRP Advisory Group that you need to be mindful of.

If you're unsure about the strength of FRP Advisory 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.