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How Does Alpha FX Group's (LON:AFX) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Alpha FX Group (LON:AFX) shares have continued recent momentum with a 38% gain in the last month alone. Looking back a bit further, we're also happy to report the stock is up 72% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Alpha FX Group

How Does Alpha FX Group's P/E Ratio Compare To Its Peers?

Alpha FX Group's P/E of 39.52 indicates some degree of optimism towards the stock. The image below shows that Alpha FX Group has a higher P/E than the average (20.1) P/E for companies in the capital markets industry.

AIM:AFX Price Estimation Relative to Market, November 2nd 2019

Its relatively high P/E ratio indicates that Alpha FX Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Alpha FX Group's 56% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. And earnings per share have improved by 58% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Alpha FX Group's Balance Sheet Tell Us?

With net cash of UK£59m, Alpha FX Group has a very strong balance sheet, which may be important for its business. Having said that, at 15% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Alpha FX Group's P/E Ratio

Alpha FX Group's P/E is 39.5 which is above average (16.9) in its market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Alpha FX Group to have a high P/E ratio. What is very clear is that the market has become significantly more optimistic about Alpha FX Group over the last month, with the P/E ratio rising from 28.6 back then to 39.5 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.