Improved Earnings Required Before Universal Store Holdings Limited (ASX:UNI) Shares Find Their Feet

Universal Store Holdings Limited's (ASX:UNI) price-to-earnings (or "P/E") ratio of 13x 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 36x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Universal Store Holdings as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Universal Store Holdings

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Universal Store Holdings' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.4% last year. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 11% per year over the next three years. That's shaping up to be materially lower than the 17% per annum growth forecast for the broader market.

In light of this, it's understandable that Universal Store Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Universal Store Holdings' P/E

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.

As we suspected, our examination of Universal Store Holdings' analyst forecasts revealed that its inferior earnings outlook 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 1 warning sign for Universal Store Holdings that we have uncovered.

If these risks are making you reconsider your opinion on Universal Store Holdings, 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.