When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 15x, you may consider Electro Optic Systems Holdings Limited (ASX:EOS) as a stock to avoid entirely with its 31.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Recent times have been advantageous for Electro Optic Systems Holdings as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think Electro Optic Systems Holdings' future stacks up against the industry? In that case, our free report is a great place to start.
Is There Enough Growth For Electro Optic Systems Holdings?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Electro Optic Systems Holdings' to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. 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 lone analyst covering the company suggest earnings should grow by 26% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 12% per annum, which is noticeably less attractive.
With this information, we can see why Electro Optic Systems 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.
The Final Word
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 Electro Optic Systems 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.
We don't want to rain on the parade too much, but we did also find 4 warning signs for Electro Optic Systems Holdings (2 are a bit unpleasant!) that you need to be mindful of.
You might be able to find a better investment than Electro Optic Systems Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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