Earnings Not Telling The Story For Eckoh plc (LON:ECK)

With a price-to-earnings (or "P/E") ratio of 30.1x Eckoh plc (LON:ECK) 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 16x and even P/E's lower than 10x 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.

While the market has experienced earnings growth lately, Eckoh's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Eckoh

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

How Is Eckoh's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.9%. Even so, admirably EPS has lifted 43% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 4.8% each year over the next three years. With the market predicted to deliver 15% growth each year, the company is positioned for a weaker earnings result.

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

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Eckoh's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Eckoh is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Eckoh'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.