Investors Continue Waiting On Sidelines For AECI Ltd (JSE:AFE)

It's not a stretch to say that AECI Ltd's (JSE:AFE) price-to-earnings (or "P/E") ratio of 8.5x right now seems quite "middle-of-the-road" compared to the market in South Africa, where the median P/E ratio is around 9x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, AECI has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for AECI

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Is There Some Growth For AECI?

In order to justify its P/E ratio, AECI would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 27%. Pleasingly, EPS has also lifted 783% 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.

Looking ahead now, EPS is anticipated to climb by 26% per year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 12% per annum, which is noticeably less attractive.

With this information, we find it interesting that AECI is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On AECI's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that AECI currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

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

If these risks are making you reconsider your opinion on AECI, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com