Aeeris Limited's (ASX:AER) price-to-earnings (or "P/E") ratio of 60.4x might make it look like a strong sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 16x and even P/E's below 8x are quite common. 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.
For example, consider that Aeeris' financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, 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.
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 Aeeris' earnings, revenue and cash flow.
Is There Enough Growth For Aeeris?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Aeeris' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 68% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's noticeably less attractive on an annualised basis.
In light of this, it's alarming that Aeeris' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Aeeris revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Before you settle on your opinion, we've discovered 5 warning signs for Aeeris (1 doesn't sit too well with us!) that you should be aware of.
Of course, you might also be able to find a better stock than Aeeris. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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.