Ares Management Corporation's (NYSE:ARES) Price In Tune With Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Ares Management Corporation (NYSE:ARES) as a stock to avoid entirely with its 56.7x 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 so lofty.

Recent times have been pleasing for Ares Management as its earnings have risen in spite of the market's earnings going into reverse. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Ares Management

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How Is Ares Management's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 181% gain to the company's bottom line. The latest three year period has also seen an excellent 162% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 48% each year over the next three years. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.

With this information, we can see why Ares Management is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Ares Management maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Before you settle on your opinion, we've discovered 5 warning signs for Ares Management (2 are a bit unpleasant!) that you should be aware of.

If you're unsure about the strength of Ares Management's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.