Collins Foods Limited (ASX:CKF) Might Not Be As Mispriced As It Looks

There wouldn't be many who think Collins Foods Limited's (ASX:CKF) price-to-earnings (or "P/E") ratio of 18.9x is worth a mention when the median P/E in Australia is similar at about 17x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

With earnings growth that's superior to most other companies of late, Collins Foods has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Collins Foods

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Collins Foods.

How Is Collins Foods' Growth Trending?

In order to justify its P/E ratio, Collins Foods would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. EPS has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 20% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this information, we find it interesting that Collins Foods is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Collins Foods' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Collins Foods with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.