Magellan Financial Group Limited's (ASX:MFG) Prospects Need A Boost To Lift Shares

Magellan Financial Group Limited's (ASX:MFG) price-to-earnings (or "P/E") ratio of 8.1x might make it look like a strong buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 19x and even P/E's above 37x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

While the market has experienced earnings growth lately, Magellan Financial Group's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View 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.

Does Growth Match The Low P/E?

Magellan Financial Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a frustrating 4.0% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 49% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 15% per annum during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 18% growth each year, that's a disappointing outcome.

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.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Magellan Financial Group maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

Plus, you should also learn about these 3 warning signs we've spotted with Magellan Financial Group (including 1 which is potentially serious).

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.

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