Investors Appear Satisfied With Advantage Energy Ltd.'s (TSE:AAV) Prospects

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may consider Advantage Energy Ltd. (TSE:AAV) as a stock to avoid entirely with its 30.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Advantage Energy certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Advantage Energy

Want the full picture on analyst estimates for the company? Then our free report on Advantage Energy will help you uncover what's on the horizon.

How Is Advantage Energy's Growth Trending?

Advantage Energy's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 30%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 88% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 159% during the coming year according to the five analysts following the company. That's shaping up to be materially higher than the 23% growth forecast for the broader market.

With this information, we can see why Advantage Energy is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Advantage Energy's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Advantage Energy's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Advantage Energy you should know about.

You might be able to find a better investment than Advantage Energy. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.