Investors Still Aren't Entirely Convinced About Australian Clinical Labs Limited's (ASX:ACL) Earnings Despite 33% Price Jump

Australian Clinical Labs Limited (ASX:ACL) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, there still wouldn't be many who think Australian Clinical Labs' price-to-earnings (or "P/E") ratio of 18.9x is worth a mention when the median P/E in Australia is similar at about 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Australian Clinical Labs' earnings growth of late has been pretty similar to most other companies. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

Check out our latest analysis for Australian Clinical Labs

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

In order to justify its P/E ratio, Australian Clinical Labs would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 40%. However, the latest three year period hasn't been as great in aggregate 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 three analysts covering the company suggest earnings should grow by 126% over the next year. With the market only predicted to deliver 16%, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Australian Clinical Labs is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Australian Clinical Labs' P/E

Australian Clinical Labs appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Australian Clinical Labs currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 3 warning signs for Australian Clinical Labs (1 makes us a bit uncomfortable!) that you should be aware of.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.