When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider A10 Networks, Inc. (NYSE:ATEN) as a stock to potentially avoid with its 26.2x 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.
A10 Networks 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Check out our latest analysis for A10 Networks
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like A10 Networks' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 4.7% decrease to the company's bottom line. Even so, admirably EPS has lifted 93% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 36% during the coming year according to the four analysts following the company. With the market only predicted to deliver 15%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that A10 Networks' 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.
What We Can Learn From A10 Networks' P/E?
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.
As we suspected, our examination of A10 Networks' 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.
You should always think about risks. Case in point, we've spotted 1 warning sign for A10 Networks you should be aware of.
If these risks are making you reconsider your opinion on A10 Networks, 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. 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.
About NYSE:ATEN
A10 Networks
Provides networking solutions in the Americas, Japan, rest of Asia Pacific, Europe, the Middle East, and Africa.
Flawless balance sheet and undervalued.
