The Price Is Right For ECO Animal Health Group plc (LON:EAH) Even After Diving 31%

Unfortunately for some shareholders, the ECO Animal Health Group plc (LON:EAH) share price has dived 31% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

In spite of the heavy fall 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 still consider ECO Animal Health Group as a stock to avoid entirely with its 49.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

ECO Animal Health Group's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for ECO Animal Health Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on ECO Animal Health Group.

Is There Enough Growth For ECO Animal Health Group?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 86% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 30% per annum as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 14% each year, which is noticeably less attractive.

With this information, we can see why ECO Animal Health Group 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 Final Word

A significant share price dive has done very little to deflate ECO Animal Health Group's very lofty P/E. 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.

As we suspected, our examination of ECO Animal Health Group'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. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - ECO Animal Health Group has 2 warning signs we think you should be aware of.

You might be able to find a better investment than ECO Animal Health Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.