More Unpleasant Surprises Could Be In Store For Altitude Group plc's (LON:ALT) Shares After Tumbling 27%

Altitude Group plc (LON:ALT) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 31% in that time.

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 Altitude Group as a stock to avoid entirely with its 34.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Altitude Group certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Altitude Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Altitude Group's earnings, revenue and cash flow.

Is There Enough Growth For Altitude Group?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 78% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Altitude Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Altitude Group's P/E?

A significant share price dive has done very little to deflate Altitude 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.

Our examination of Altitude Group revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Altitude Group has 4 warning signs we think you should be aware of.

If you're unsure about the strength of Altitude 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.