Gaming manufacturer and developer, Aristocrat Leisure Limited (ASX: ALL) is sitting near a 52-week high after gains of around 75% in the last year, outshining all but a few of the S&P/ASX 100 (Index: ^AXTO) (ASX: XTO) members.

In recent years, Aristocrat has been focusing on online opportunities for further growth, most notably with the acquisition of Video Gaming Technologies.

Aristocrat is well run, generating a return on equity of 27% and investors have been rewarded with average annual returns of 51% over the last five years.

A P/E ratio of 27 suggests it is still priced as a growth stock. This is not without good reason – net profits doubled in the last year. However, further growth will be required in the next few years to justify the current earnings multiple.

Analysts have forecast earnings per share of 70 cents for 2017 and a dividend of 32.3 cents per share, implying a forward P/E of 22.6 and a yield of around 2%.

The P/E ratio is of limited use without also considering the growth rate. A P/E growth ratio (PEG) of below 1 is an indication that a stock may be cheap relative to its growth.

Commsec currently calculates a PEG of 0.57, on the basis of a P/E ratio of 27 and a growth rate of nearly 50%. This suggests that Aristocrat is currently still cheaper than most large cap stocks in relation to its growth potential.

Although a low PEG ratio can be an indicator of value, it is also a sign that the market is pricing in the risk that the high rate of growth will not continue in the future.

In my view, unless investors are confident that Aristocrat can continue to make significant acquisitions that contribute to further growth, they may be better off waiting for a better entry point.

On the plus side, Aristocrat generates just 20% of revenues from Australia and New Zealand, with the majority coming from the US. This means any further weakness in the Australian dollar would be a boost for its bottom line.

However, investors should be aware that last month, media reports revealed a potential class action lawsuit to be led by Maurice Blackburn claiming that some of Aristocrat’s poker machines are misleading and deceptive. It appears the market is not too worried about this, as its shares have continued to trade higher.

Whether or not a lawsuit has an impact on Aristocrat, given the industry it operates in, it may not be everyone’s idea of an ethical investment.

These Low Interest Rates Could Totally Devastate Your Retirement!

With global interest rates set to remain at these "emergency low" levels for years -- perhaps even decades -- unless you take decisive action NOW, your retirement could be seriously at risk.

Click here to learn how to NOT run out of money in retirement.


Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.

Enter your email below to discover the name, code and a full investment analysis in our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2016.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our">Financial Services Guide (FSG) for more information.

Motley Fool contributor Matthew Bugden has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.