Atlantic American Corporation's (NASDAQ:AAME) Shares Leap 27% Yet They're Still Not Telling The Full Story

Despite an already strong run, Atlantic American Corporation (NASDAQ:AAME) shares have been powering on, with a gain of 27% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.0% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Atlantic American's P/E ratio of 18.3x, since the median price-to-earnings (or "P/E") ratio in the United States is also close to 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

For example, consider that Atlantic American's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Atlantic American

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Atlantic American will help you shine a light on its historical performance.

How Is Atlantic American's Growth Trending?

The only time you'd be comfortable seeing a P/E like Atlantic American's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's bottom line. Even so, admirably EPS has lifted 127% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is only predicted to deliver 10% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's curious that Atlantic American's P/E sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From Atlantic American's P/E?

Atlantic American's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Atlantic American currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

You always need to take note of risks, for example - Atlantic American has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Atlantic American'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.