Algoma Central Corporation's (TSE:ALC) price-to-earnings (or "P/E") ratio of 20.3x might make it look like a sell right now compared to the market in Canada, 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 lofty.
While the market has experienced earnings growth lately, Algoma Central's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Algoma Central 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, Algoma Central would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a frustrating 57% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 1,581% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 90% during the coming year according to the four analysts following the company. With the market only predicted to deliver 8.6%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Algoma Central's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Algoma Central 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.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Algoma Central (of which 1 shouldn't be ignored!) you should know about.
You might be able to find a better investment than Algoma Central. 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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