FlexiGroup Limited's (ASX:FXL) Low P/E No Reason For Excitement

June 25, 2020

With a price-to-earnings (or "P/E") ratio of 7.8x FlexiGroup Limited (ASX:FXL) 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

FlexiGroup could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

View our latest analysis for FlexiGroup

How Does FlexiGroup's P/E Ratio Compare To Its Industry Peers?

It's plausible that FlexiGroup's particularly low P/E ratio could be a result of tendencies within its own industry. The image below shows that the Consumer Finance industry as a whole also has a P/E ratio lower than the market. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. Some industry P/E's don't move around a lot and right now most companies within the Consumer Finance industry should be getting stifled. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

ASX:FXL Price Based on Past Earnings June 25th 2020

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Does Growth Match The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 2.1% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is noticeably more attractive.

With this information, we can see why FlexiGroup is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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 FlexiGroup maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for FlexiGroup (of which 1 is significant!) you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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