Investors Don't See Light At End Of Standard Mercantile Acquisition Corp.'s (TSE:SMA) Tunnel

With a price-to-earnings (or "P/E") ratio of 2.6x Standard Mercantile Acquisition Corp. (TSE:SMA) may be sending very bullish signals at the moment, given that almost half of all companies in Canada have P/E ratios greater than 12x and even P/E's higher than 24x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For instance, Standard Mercantile Acquisition's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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 out of favour.

See our latest analysis for Standard Mercantile Acquisition

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 Standard Mercantile Acquisition's earnings, revenue and cash flow.

How Is Standard Mercantile Acquisition's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Standard Mercantile Acquisition's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.9%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Standard Mercantile Acquisition is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

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

We don't want to rain on the parade too much, but we did also find 4 warning signs for Standard Mercantile Acquisition (3 can't be ignored!) that you need to be mindful of.

You might be able to find a better investment than Standard Mercantile Acquisition. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.