There Is A Reason AVJennings Limited's (ASX:AVJ) Price Is Undemanding

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 16x, you may consider AVJennings Limited (ASX:AVJ) as an attractive investment with its 8.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

AVJennings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

View our latest analysis for AVJennings

Where Does AVJennings' P/E Sit Within Its Industry?

It's plausible that AVJennings' low P/E ratio could be a result of tendencies within its own industry. It turns out the Real Estate industry in general also has a P/E ratio lower than the market, as the graphic below shows. So this certainly goes a fair way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Real Estate industry. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.

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How Is AVJennings' Growth Trending?

AVJennings' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. Still, incredibly EPS has fallen 42% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 2.4% per year over the next three years. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.

In light of this, it's understandable that AVJennings' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of AVJennings' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 4 warning signs for AVJennings that you should be aware of.

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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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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