Optimistic Investors Push Aeorema Communications plc (LON:AEO) Shares Up 26% But Growth Is Lacking

The Aeorema Communications plc (LON:AEO) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

Following the firm bounce in price, given close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 16x, you may consider Aeorema Communications as a stock to avoid entirely with its 28.7x 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 so lofty.

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As an illustration, earnings have deteriorated at Aeorema Communications over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Aeorema Communications

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Aeorema Communications will help you shine a light on its historical performance.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Aeorema Communications' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 65% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's an unpleasant look.

With this information, we find it concerning that Aeorema Communications is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Aeorema Communications' P/E?

The strong share price surge has got Aeorema Communications' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Aeorema Communications currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Aeorema Communications (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Aeorema Communications' 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.