There's Reason For Concern Over Adtalem Global Education Inc.'s (NYSE:ATGE) Massive 27% Price Jump

Adtalem Global Education Inc. (NYSE:ATGE) shareholders have had their patience rewarded with a 27% share price jump in the last month. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Adtalem Global Education's price-to-earnings (or "P/E") ratio of 20.7x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Our free stock report includes 1 warning sign investors should be aware of before investing in Adtalem Global Education. Read for free now.

With earnings growth that's exceedingly strong of late, Adtalem Global Education has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Adtalem Global Education

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Adtalem Global Education's earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 125%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Adtalem Global Education's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Adtalem Global Education's P/E

The large bounce in Adtalem Global Education's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Adtalem Global Education currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Adtalem Global Education that you should be aware of.

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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