Stock Analysis

With AFT Pharmaceuticals Limited (NZSE:AFT) It Looks Like You'll Get What You Pay For

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When close to half the companies in New Zealand have price-to-earnings ratios (or "P/E's") below 21x, you may consider AFT Pharmaceuticals Limited (NZSE:AFT) as a stock to avoid entirely with its 64.9x 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.

AFT Pharmaceuticals hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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 AFT Pharmaceuticals

NZSE:AFT Price Based on Past Earnings June 2nd 2021
Keen to find out how analysts think AFT Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For AFT Pharmaceuticals?

The only time you'd be truly comfortable seeing a P/E as steep as AFT Pharmaceuticals' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. 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.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 49% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 7.8% each year, which is noticeably less attractive.

In light of this, it's understandable that AFT Pharmaceuticals' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On AFT Pharmaceuticals' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that AFT Pharmaceuticals maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for AFT Pharmaceuticals (2 are concerning) you should be aware of.

If these risks are making you reconsider your opinion on AFT Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. 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.
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