The Market Doesn't Like What It Sees From Pason Systems Inc.'s (TSE:PSI) Earnings Yet

Pason Systems Inc.'s (TSE:PSI) price-to-earnings (or "P/E") ratio of 9.5x 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 33x 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 earnings that are retreating more than the market's of late, Pason Systems has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Pason Systems

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

Is There Any Growth For Pason Systems?

In order to justify its P/E ratio, Pason Systems would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.7%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 3,149% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 3.9% per year as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 10% per year growth forecast for the broader market.

In light of this, it's understandable that Pason Systems' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Pason Systems' P/E

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.

As we suspected, our examination of Pason Systems' 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Pason Systems (1 is a bit unpleasant) you should be aware of.

If you're unsure about the strength of Pason Systems' 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.