With a price-to-earnings (or "P/E") ratio of 11.6x Prime Financial Group Limited (ASX:PFG) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 16x and even P/E's higher than 31x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Prime Financial Group has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.free report on Prime Financial Group's earnings, revenue and cash flow.
Is There Any Growth For Prime Financial Group?
In order to justify its P/E ratio, Prime Financial Group would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 70% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 1.3% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's understandable that Prime Financial Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
The Bottom Line On Prime Financial Group's P/E
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Prime Financial Group revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Prime Financial Group (2 are potentially serious) you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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This article by Simply Wall St is general in nature. 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.
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