Earnings Working Against JB Hi-Fi Limited's (ASX:JBH) Share Price

JB Hi-Fi Limited's (ASX:JBH) price-to-earnings (or "P/E") ratio of 13.9x might make it look like a 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 limited.

Recent times haven't been advantageous for JB Hi-Fi as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for JB Hi-Fi

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

The only time you'd be truly comfortable seeing a P/E as low as JB Hi-Fi's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 7.3% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to slump, contracting by 2.5% per annum during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 17% per year, which paints a poor picture.

With this information, we are not surprised that JB Hi-Fi is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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.

As we suspected, our examination of JB Hi-Fi's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

Before you take the next step, you should know about the 2 warning signs for JB Hi-Fi (1 is concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on JB Hi-Fi, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.