GWA Group Limited's (ASX:GWA) Earnings Are Not Doing Enough For Some Investors

With a price-to-earnings (or "P/E") ratio of 13.6x GWA Group Limited (ASX:GWA) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 19x and even P/E's higher than 37x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, GWA Group has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for GWA Group

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

How Is GWA Group's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. Still, incredibly EPS has fallen 2.1% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 5.2% per annum during the coming three years according to the five analysts following the company. With the market predicted to deliver 17% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why GWA Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On GWA Group's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of GWA Group's 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with GWA Group.

If you're unsure about the strength of GWA Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.