Avance Gas Holding Ltd (OB:AGAS) Shares Fly 26% But Investors Aren't Buying For Growth

Avance Gas Holding Ltd (OB:AGAS) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The annual gain comes to 114% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, given about half the companies in Norway have price-to-earnings ratios (or "P/E's") above 12x, you may still consider Avance Gas Holding as an attractive investment with its 6.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been advantageous for Avance Gas Holding as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Avance Gas Holding

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

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Avance Gas Holding's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 84%. The strong recent performance means it was also able to grow EPS by 92% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 12% per annum during the coming three years according to the four analysts following the company. With the market predicted to deliver 21% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Avance Gas Holding's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Avance Gas Holding's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Avance Gas Holding maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 5 warning signs we've spotted with Avance Gas Holding (including 3 which are a bit unpleasant).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.