Lacklustre Performance Is Driving Magellan Financial Group Limited's (ASX:MFG) Low P/E

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider Magellan Financial Group Limited (ASX:MFG) as a highly attractive investment with its 8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Magellan Financial Group 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Magellan Financial Group

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

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 7.7% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings growth is heading into negative territory, declining 14% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 19% per year, which paints a poor picture.

In light of this, it's understandable that Magellan Financial Group's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Magellan Financial 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 Magellan Financial Group's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

Before you take the next step, you should know about the 3 warning signs for Magellan Financial Group (2 make us uncomfortable!) that we have uncovered.

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.

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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.