A Piece Of The Puzzle Missing From OM Holdings Limited's (ASX:OMH) Share Price

With a price-to-earnings (or "P/E") ratio of 4.6x OM Holdings Limited (ASX:OMH) may be sending very bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 16x and even P/E's higher than 30x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

For instance, OM Holdings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for OM Holdings

Does OM Holdings Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout OM Holdings' industry may help to explain its particularly low P/E ratio. You'll notice in the figure below that P/E ratios in the Metals and Mining industry are also lower than the market. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. Some industry P/E's don't move around a lot and right now most companies within the Metals and Mining industry should be getting stifled. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.

Although there are no analyst estimates available for OM Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is OM Holdings' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like OM Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 65% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 609% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 0.3% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that OM Holdings' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

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.

Our examination of OM Holdings revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you take the next step, you should know about the 3 warning signs for OM Holdings (1 doesn't sit too well with us!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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This article by Simply Wall St is general in nature. 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.
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