With a price-to-earnings (or "P/E") ratio of 11.2x Credit Corp Group Limited (ASX:CCP) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 21x and even P/E's higher than 38x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that's superior to most other companies of late, Credit Corp Group has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
See our latest analysis for Credit Corp Group
How Is Credit Corp Group's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Credit Corp Group's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 86% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 7.2% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 9.1% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 17% per year, which is noticeably more attractive.
In light of this, it's understandable that Credit Corp Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
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 Credit Corp Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 1 warning sign for Credit Corp Group 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 low P/E.
Valuation is complex, but we're here to simplify it.
Discover if Credit Corp Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.