ADvTECH Limited's (JSE:ADH) Popularity With Investors Is Under Threat From Overpricing

ADvTECH Limited's (JSE:ADH) price-to-earnings (or "P/E") ratio of 15.2x might make it look like a strong sell right now compared to the market in South Africa, where around half of the companies have P/E ratios below 8x and even P/E's below 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent times have been advantageous for ADvTECH as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for ADvTECH

If you'd like to see what analysts are forecasting going forward, you should check out our free report on ADvTECH .

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 64% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% during the coming year according to the sole analyst following the company. That's shaping up to be materially lower than the 16% growth forecast for the broader market.

In light of this, it's alarming that ADvTECH's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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 ADvTECH currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for ADvTECH with six simple checks will allow you to discover any risks that could be an issue.

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.