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When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 17x, you may consider Aecon Group Inc. (TSE:ARE) as a stock to potentially avoid with its 20x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Recent times haven't been advantageous for Aecon Group as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
View our latest analysis for Aecon Group
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Does Growth Match The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like Aecon Group's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 10% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 3.4% during the coming year according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 7.4%, which is noticeably more attractive.
With this information, we find it concerning that Aecon Group is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On Aecon Group's P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Aecon Group currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.