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Alpha Pro Tech, Ltd. (NYSEMKT:APT) as a stock to avoid entirely with its 35.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.” data-reactid=”29″ type=”text”>When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 16x, you may consider Alpha Pro Tech, Ltd. (NYSEMKT:APT) as a stock to avoid entirely with its 35.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
Recent times have been quite advantageous for Alpha Pro Tech as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.
How Does Alpha Pro Tech’s P/E Ratio Compare To Its Industry Peers?
It’s plausible that Alpha Pro Tech’s particularly high P/E ratio could be a result of tendencies within its own industry. You’ll notice in the figure below that P/E ratios in the Building industry are also higher than the market. So it appears the company’s ratio could be influenced somewhat by these industry numbers currently. Some industry P/E’s don’t move around a lot and right now most companies within the Building industry should be getting a boost. Still, the strength of the company’s earnings will most likely determine where its P/E shall sit.
free report on Alpha Pro Tech’s earnings, revenue and cash flow.” data-reactid=”46″ type=”text”>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 Alpha Pro Tech’s earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The High P/E?
The only time you’d be truly comfortable seeing a P/E as steep as Alpha Pro Tech’s is when the company’s growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 72% last year. The strong recent performance means it was also able to grow EPS by 175% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is predicted to shrink 11% in the next 12 months, the company’s positive momentum based on recent medium-term earnings results is a bright spot for the moment.
With this information, we can see why Alpha Pro Tech is trading at a high P/E compared to the market. Presumably shareholders aren’t keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.
The Final Word
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 Alpha Pro Tech maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. We still remain cautious about the company’s ability to stay its recent course and swim against the current of the broader market turmoil. Otherwise, it’s hard to see the share price falling strongly in the near future if its earnings performance persists.
2 warning signs for Alpha Pro Tech that you need to be mindful of.” data-reactid=”59″ type=”text”>We don’t want to rain on the parade too much, but we did also find 2 warning signs for Alpha Pro Tech that you need to be mindful of.
our interactive list of high quality stocks to get an idea of what else is out there.” data-reactid=”60″ type=”text”>If these risks are making you reconsider your opinion on Alpha Pro Tech, explore our interactive list of high quality stocks to get an idea of what else is out there.
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.