With a price-to-earnings (or "P/E") ratio of 13.5x Suncorp Group Limited (ASX:SUN) 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 39x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Recent times have been advantageous for Suncorp Group as its earnings have been rising faster than most other companies. 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.
Check out our latest analysis for Suncorp Group
How Is Suncorp Group's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Suncorp Group's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 66% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 129% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 3.8% per year during the coming three years according to the eleven analysts following the company. Meanwhile, the broader market is forecast to expand by 18% each year, which paints a poor picture.
With this information, we are not surprised that Suncorp Group is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
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.
We've established that Suncorp Group maintains its low P/E on the weakness of its forecast for sliding earnings, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware Suncorp Group is showing 2 warning signs in our investment analysis, and 1 of those is significant.
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.