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The Pengana Capital Group Limited (ASX:PCG) share price has done very well over the last month, posting an excellent gain of 25%. The last 30 days bring the annual gain to a very sharp 71%.
Following the firm bounce in price, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 17x, you may consider Pengana Capital Group as a stock to potentially avoid with its 19.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Pengana Capital Group certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Pengana Capital Group
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What Are Growth Metrics Telling Us About The High P/E?
Pengana Capital Group's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. The latest three year period has also seen a 17% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it concerning that Pengana Capital Group is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
What We Can Learn From Pengana Capital Group's P/E?
Pengana Capital Group's P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.