With a price-to-earnings (or "P/E") ratio of 51.3x JTC PLC (LON:JTC) may be sending very bearish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios under 15x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, JTC has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for JTC
Is There Enough Growth For JTC?
The only time you'd be truly comfortable seeing a P/E as steep as JTC's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 130% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 7.2% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 28% per annum during the coming three years according to the eight analysts following the company. With the market only predicted to deliver 12% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why JTC 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 Key Takeaway
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.
As we suspected, our examination of JTC's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Plus, you should also learn about these 2 warning signs we've spotted with JTC.
If you're unsure about the strength of JTC'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.
About LSE:JTC
JTC
Provides fund, corporate, and private wealth services to institutional and private clients.
Excellent balance sheet with reasonable growth potential.
