Earnings Tell The Story For Aristocrat Leisure Limited (ASX:ALL)

With a price-to-earnings (or "P/E") ratio of 30.2x Aristocrat Leisure Limited (ASX:ALL) may be sending bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 21x and even P/E's lower than 12x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Aristocrat Leisure could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Aristocrat Leisure

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Aristocrat Leisure.

How Is Aristocrat Leisure's Growth Trending?

Aristocrat Leisure's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.4%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 35% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 21% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 17% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Aristocrat Leisure is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Aristocrat Leisure maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Aristocrat Leisure with six simple checks will allow you to discover any risks that could be an issue.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.