When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider FFI Holdings Limited (ASX:FFI) as an attractive investment with its 16x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
FFI Holdings has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.free report on FFI Holdings will help you shine a light on its historical performance.
How Is FFI Holdings' Growth Trending?
In order to justify its P/E ratio, FFI Holdings would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.7% last year. The latest three year period has also seen an excellent 48% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why FFI Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
What We Can Learn From FFI Holdings' P/E?
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.
We've established that FFI Holdings maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
You always need to take note of risks, for example - FFI Holdings has 2 warning signs we think you should be aware of.
Of course, you might also be able to find a better stock than FFI Holdings. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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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