Arcadium Lithium plc's (NYSE:ALTM) P/E Still Appears To Be Reasonable

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Arcadium Lithium plc (NYSE:ALTM) as a stock to potentially avoid with its 21.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Arcadium Lithium as its earnings have been falling quicker than most other companies. It might be that many expect the dismal 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 Arcadium Lithium

Keen to find out how analysts think Arcadium Lithium's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Arcadium Lithium's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Arcadium Lithium's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 29% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 10.0% per year growth forecast for the broader market.

In light of this, it's understandable that Arcadium Lithium's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Arcadium Lithium's P/E

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.

As we suspected, our examination of Arcadium Lithium's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Arcadium Lithium that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.