It's not a stretch to say that African Rainbow Capital Investments Limited's (JSE:AIL) price-to-earnings (or "P/E") ratio of 6.9x right now seems quite "middle-of-the-road" compared to the market in South Africa, where the median P/E ratio is around 9x. 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 quite advantageous for African Rainbow Capital Investments as its earnings have been rising very briskly. 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.
Check out our latest analysis for African Rainbow Capital Investments
Although there are no analyst estimates available for African Rainbow Capital Investments, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is African Rainbow Capital Investments' Growth Trending?
African Rainbow Capital Investments' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 39% last year. Pleasingly, EPS has also lifted 288% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.2% shows it's noticeably more attractive on an annualised basis.
In light of this, it's curious that African Rainbow Capital Investments' P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.
The Final Word
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.
We've established that African Rainbow Capital Investments currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.