It's great to see Alpha FX Group (LON:AFX) shareholders have their patience rewarded with a 33% share price pop in the last month. Looking back a bit further, we're also happy to report the stock is up 52% 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
View our latest analysis for Alpha FX Group
Does Alpha FX Group Have A Relatively High Or Low P/E For Its Industry?
Alpha FX Group's P/E of 36.32 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (18.9) for companies in the capital markets industry is lower than Alpha FX Group's P/E.
Its relatively high P/E ratio indicates that Alpha FX Group shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. 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. Even better, EPS is up 58% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.