Earnings Working Against Qantas Airways Limited's (ASX:QAN) Share Price

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider Qantas Airways Limited (ASX:QAN) as a highly attractive investment with its 6.1x 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 so limited.

With earnings growth that's superior to most other companies of late, Qantas Airways has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, 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 Qantas Airways

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Qantas Airways.

How Is Qantas Airways' Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 192% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 4.7% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 17% per year, which is noticeably more attractive.

With this information, we can see why Qantas Airways is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Qantas Airways maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Qantas Airways has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

If you're unsure about the strength of Qantas Airways' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.