Alfen N.V. (AMS:ALFEN) Looks Just Right With A 26% Price Jump

The Alfen N.V. (AMS:ALFEN) share price has done very well over the last month, posting an excellent gain of 26%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.

After such a large jump in price, Alfen's price-to-earnings (or "P/E") ratio of 32.3x might make it look like a strong sell right now compared to the market in the Netherlands, where around half of the companies have P/E ratios below 16x and even P/E's below 7x are quite common. 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.

Alfen certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Alfen

Want the full picture on analyst estimates for the company? Then our free report on Alfen will help you uncover what's on the horizon.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Alfen would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 271% overall rise in EPS, in spite of its uninspiring short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the nine analysts watching the company. With the market only predicted to deliver 17% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Alfen's 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.

What We Can Learn From Alfen's P/E?

Shares in Alfen have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Alfen's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Alfen, and understanding these should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.