Adcorp Holdings Limited's (JSE:ADR) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 3.5x Adcorp Holdings Limited (JSE:ADR) may be sending very bullish signals at the moment, given that almost half of all companies in South Africa have P/E ratios greater than 9x and even P/E's higher than 13x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Adcorp Holdings has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Adcorp Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Adcorp Holdings' earnings, revenue and cash flow.

Is There Any Growth For Adcorp Holdings?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Adcorp Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Adcorp Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Adcorp Holdings revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 4 warning signs for Adcorp Holdings (1 can't be ignored!) that you should be aware of.

Of course, you might also be able to find a better stock than Adcorp Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.