Market Participants Recognise Ryanair Holdings plc's (ISE:RYA) Earnings Pushing Shares 28% Higher

Ryanair Holdings plc (ISE:RYA) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Since its price has surged higher, Ryanair Holdings' price-to-earnings (or "P/E") ratio of 14.1x might make it look like a sell right now compared to the market in Ireland, where around half of the companies have P/E ratios below 10x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

We check all companies for important risks. See what we found for Ryanair Holdings in our free report.

While the market has experienced earnings growth lately, Ryanair Holdings' 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.

View our latest analysis for Ryanair Holdings

Keen to find out how analysts think Ryanair Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Ryanair Holdings' Growth Trending?

In order to justify its P/E ratio, Ryanair Holdings would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 17%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 13% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.4% each year, which is noticeably less attractive.

In light of this, it's understandable that Ryanair Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Ryanair Holdings' P/E is getting right up there since its shares have risen strongly. 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.

As we suspected, our examination of Ryanair Holdings' 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Ryanair Holdings with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Ryanair Holdings. 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.