When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) above 19x, you may consider Alpha Pro Tech, Ltd. (NYSEMKT:APT) as an attractive investment with its 16x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Alpha Pro Tech certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company’s earnings are going to fall away like everyone else’s soon. 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 out of favour.
Check out our latest analysis for Alpha Pro Tech
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Does Growth Match The Low P/E?
There’s an inherent assumption that a company should underperform the market for P/E ratios like Alpha Pro Tech’s to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 188%. The strong recent performance means it was also able to grow EPS by 355% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 122% over the next year. That’s shaping up to be materially higher than the 4.4% growth forecast for the broader market.
With this information, we find it odd that Alpha Pro Tech is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Final Word
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 currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 2 warning signs with Alpha Pro Tech, and understanding them should be part of your investment process.
Of course, you might also be able to find a better stock than Alpha Pro Tech. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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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