Alpha Pro Tech, Ltd.’s (NYSEMKT:APT) price-to-earnings (or “P/E”) ratio of 45.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E’s below 9x 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.
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. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Alpha Pro Tech will help you shine a light on its historical performance.
Is There Enough Growth For Alpha Pro Tech?
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.
If we review the last year of earnings growth, the company posted a terrific increase of 72%. Pleasingly, EPS has also lifted 175% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is predicted to shrink 0.6% 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. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.
The Key Takeaway
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. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Although, if the company’s relative performance doesn’t change it will continue to provide strong support to the share price.
You should always think about risks. Case in point, we’ve spotted 2 warning signs for Alpha Pro Tech you should be aware of.
You might be able to find a better investment than Alpha Pro Tech. 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.