A Piece Of The Puzzle Missing From Magna International Inc.'s (TSE:MG) Share Price

Magna International Inc.'s (TSE:MG) price-to-earnings (or "P/E") ratio of 11.7x might make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 16x and even P/E's above 32x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Magna International has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Magna International

Keen to find out how analysts think Magna International's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Magna International's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 5.8%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 53% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 32% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.5% each year, which is noticeably less attractive.

In light of this, it's peculiar that Magna International's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

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 Magna International currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Magna International you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.