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The a2 Milk Company Limited's (NZSE:ATM) Popularity With Investors Is Clear

Simply Wall St
·3-min read

The a2 Milk Company Limited's (NZSE:ATM) price-to-earnings (or "P/E") ratio of 33.9x might make it look like a strong sell right now compared to the market in New Zealand, where around half of the companies have P/E ratios below 22x and even P/E's below 11x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for a2 Milk as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for a2 Milk

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Want the full picture on analyst estimates for the company? Then our free report on a2 Milk will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, a2 Milk would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. The latest three year period has also seen an excellent 316% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the analysts watching the company. With the market only predicted to deliver 10% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that a2 Milk'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 Bottom Line On a2 Milk'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 a2 Milk 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for a2 Milk that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's 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.

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