Market Participants Recognise AFT Pharmaceuticals Limited's (NZSE:AFT) Earnings

With a price-to-earnings (or "P/E") ratio of 56.9x AFT Pharmaceuticals Limited (NZSE:AFT) may be sending very bearish signals at the moment, given that almost half of all companies in New Zealand have P/E ratios under 22x and even P/E's lower than 9x are not unusual. 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.

AFT Pharmaceuticals could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for AFT Pharmaceuticals

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. 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 four analysts covering the company suggest earnings should grow by 49% per year over the next three years. With the market only predicted to deliver 6.0% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why AFT Pharmaceuticals is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From AFT Pharmaceuticals' P/E?

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.

As we suspected, our examination of AFT Pharmaceuticals' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for AFT Pharmaceuticals (2 don't sit too well with us!) that you need to take into consideration.

If you're unsure about the strength of AFT Pharmaceuticals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.

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