Alpha FX Group plc's (LON:AFX) Price In Tune With Earnings
With a price-to-earnings (or "P/E") ratio of 30.2x Alpha FX Group plc (LON:AFX) may be sending very 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 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
The earnings growth achieved at Alpha FX Group over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for Alpha FX Group
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 Alpha FX Group's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The High P/E?
Alpha FX Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 29%. Pleasingly, EPS has also lifted 123% 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.
Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 6.6% shows it's a great look while it lasts.
With this information, we can see why Alpha FX Group is trading at a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.
The Bottom Line On Alpha FX Group's 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 Alpha FX Group maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Alpha FX Group, and understanding these should be part of your investment process.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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