Adcorp Holdings Limited's (JSE:ADR) Business And Shares Still Trailing The Market

With a price-to-earnings (or "P/E") ratio of 5.7x Adcorp Holdings Limited (JSE:ADR) may be sending bullish signals at the moment, given that almost half of all companies in South Africa have P/E ratios greater than 10x and even P/E's higher than 15x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Recent times have been quite advantageous for Adcorp Holdings as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Adcorp Holdings

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Is There Any Growth For Adcorp Holdings?

The only time you'd be truly comfortable seeing a P/E as low as Adcorp Holdings' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 60%. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Adcorp Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Adcorp Holdings' P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Adcorp Holdings maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Adcorp Holdings, and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.