To the annoyance of some shareholders, The Rank Group Plc (LON:RNK) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 45% share price drop.
In spite of the heavy fall in price, given close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 17x, you may still consider Rank Group as a stock to avoid entirely with its 39.9x 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 lofty.
With earnings that are retreating more than the market's of late, Rank Group has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think Rank Group's future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The High P/E?
In order to justify its P/E ratio, Rank Group would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 65%. This means it has also seen a slide in earnings over the longer-term as EPS is down 84% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 281% during the coming year according to the three analysts following the company. With the market only predicted to deliver 2.6%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Rank Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
Rank Group's shares may have retreated, but its P/E is still flying high. 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.
As we suspected, our examination of Rank Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Rank Group that you should be aware of.
If these risks are making you reconsider your opinion on Rank Group, 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.
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