Centrepoint Alliance Limited (ASX:CAF) The price-to-earnings (or “P/E”) ratio of 69.2x might give the impression that this is a strong sell-off at the moment compared to the Australian market, where around the half of companies have P/E ratios below 17x and even P/Es below 9x are quite common. However, the P/E may be quite high for a reason and it requires further investigation to determine if it is warranted.
For example, Centrepoint Alliance’s declining earnings of late should be food for thought. Many may expect the company to still outperform most other companies in the coming period, which has kept the P/E from crashing. If not, existing shareholders might be quite worried about the viability of the share price.
Check out our latest analysis for Centrepoint Alliance
While there are no analyst estimates available for Centrepoint Alliance, take a look at this free data-rich visualization to see how the business is doing on profit, revenue, and cash flow.
Does the growth match the high P/E?
In order to justify its P/E ratio, Centrepoint Alliance would need to produce exceptional growth well above that of the market.
Looking back, last year brought a frustrating 34% drop in the company’s bottom line. This wiped out all of its gains over the past three years, with virtually no EPS changes made overall. As a result, shareholders would probably not have been too pleased with the unstable medium-term growth rates.
Weighting this recent medium-term earnings trajectory against the broader market’s one-year forecast for a 22% expansion shows that it is significantly less attractive on an annualized basis.
With this information, we see that Centrepoint Alliance is trading at a higher P/E than the market. It seems that most investors are ignoring the relatively subdued recent growth rates and hoping for a turnaround in the company’s business prospects. Only the most daring would assume that these prices are sustainable, as the continuation of recent earnings trends is likely to weigh heavily on the stock price going forward.
The Key Takeaway
Generally, we prefer to limit the use of the price/earnings ratio to establishing what the market thinks of the overall health of a company.
We have established that Centrepoint Alliance is currently trading at a much higher P/E than expected as its recent three-year growth is below broader market expectations. At present, we are increasingly uncomfortable with the high P/E as this earnings performance is unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, shareholders’ investments will be exposed to significant risk and potential investors may pay an excessive premium.
It is always necessary to consider the ubiquitous spectrum of investment risk. We have identified 5 warning signs with Centrepoint Allianceand understanding them should be part of your investment process.
If these risks make you reconsider your opinion of Centrepoint Allianceexplore our interactive list of high-quality stocks to get an idea of what else is out there.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.