Yahoo Finance Arix Bioscience plc's (LON:ARIX) Prospects Need A Boost To Lift Shares
When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 24x, you may consider Arix Bioscience plc (LON:ARIX) as a highly attractive investment with its 5.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times have been advantageous for Arix Bioscience as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Arix Bioscience
Want the full picture on analyst estimates for the company? Then our free report on Arix Bioscience will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Arix Bioscience's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 115% last year. The latest three year period has also seen a 18% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 26% as estimated by the lone analyst watching the company. That's not great when the rest of the market is expected to grow by 27%.
With this information, we are not surprised that Arix Bioscience is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Key Takeaway
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Arix Bioscience's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Arix Bioscience (of which 2 shouldn't be ignored!) you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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.
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