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When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 15x, you may consider 888 Holdings plc (LON:888) as a stock to potentially avoid with its 21.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
888 Holdings 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Where Does 888 Holdings' P/E Sit Within Its Industry?
We'd like to see if P/E's within 888 Holdings' industry might provide some colour around the company's high P/E ratio. You'll notice in the figure below that P/E ratios in the Hospitality industry are also higher than the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Hospitality industry's current setting, most of its constituents' P/E's would be expected to be raised up. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on 888 Holdings.
How Is 888 Holdings' Growth Trending?
In order to justify its P/E ratio, 888 Holdings would need to produce impressive growth in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. As a result, earnings from three years ago have also fallen 21% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 11% per year over the next three years. That's shaping up to be materially higher than the 8.2% per year growth forecast for the broader market.
With this information, we can see why 888 Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From 888 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.
We've established that 888 Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with 888 Holdings, and understanding these should be part of your investment process.
Of course, you might also be able to find a better stock than 888 Holdings. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
This article by Simply Wall St is general in nature. 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.
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