There wouldn't be many who think Argan, Inc.'s (NYSE:AGX) price-to-earnings (or "P/E") ratio of 18.7x is worth a mention when the median P/E in the United States is similar at about 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been advantageous for Argan as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
View our latest analysis for Argan
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Argan's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 70% gain to the company's bottom line. Pleasingly, EPS has also lifted 461% 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.
Looking ahead now, EPS is anticipated to climb by 21% during the coming year according to the two analysts following the company. With the market only predicted to deliver 10%, the company is positioned for a stronger earnings result.
With this information, we find it interesting that Argan is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.
What We Can Learn From Argan's P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Argan's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Argan with six simple checks.
Of course, you might also be able to find a better stock than Argan. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.