Ashtead Group plc's (LON:AHT) P/E Is On The Mark
With a price-to-earnings (or "P/E") ratio of 21x Ashtead Group plc (LON:AHT) may be sending bearish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios under 15x and even P/E's lower than 10x 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 as high as it is.
Ashtead Group 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Ashtead Group
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Ashtead Group's is when the company's growth is on track to outshine the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.7%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 18% per year over the next three years. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Ashtead Group's 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.
The Final Word
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 Ashtead Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 1 warning sign for Ashtead Group that we have uncovered.
If these risks are making you reconsider your opinion on Ashtead Group, explore our interactive list of high quality stocks to get an idea of what else is out there.
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