Empire Company Limited's (TSE:EMP.A) Business Is Yet to Catch Up With Its Share Price

There wouldn't be many who think Empire Company Limited's (TSE:EMP.A) price-to-earnings (or "P/E") ratio of 11.6x is worth a mention when the median P/E in Canada is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

For example, consider that Empire's financial performance has been pretty ordinary lately as earnings growth is non-existent. One possibility is that the P/E is moderate because investors think this benign earnings growth rate might not be enough to outperform the broader market in the near future. 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 not quite in favour.

Check out our latest analysis for Empire

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Empire's earnings, revenue and cash flow.

Does Growth Match The P/E?

In order to justify its P/E ratio, Empire would need to produce growth that's similar to the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Fortunately, a few good years before that means that it was still able to grow EPS by 26% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 12% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's curious that Empire's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

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 Empire currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Empire has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.