Benign Growth For E-L Financial Corporation Limited (TSE:ELF) Underpins Its Share Price

E-L Financial Corporation Limited's (TSE:ELF) price-to-earnings (or "P/E") ratio of 3.6x might make it look like a strong 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 quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, E-L Financial has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for E-L Financial

Although there are no analyst estimates available for E-L Financial, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For E-L Financial?

In order to justify its P/E ratio, E-L Financial would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 48% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 6.5% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 29% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that E-L Financial's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On E-L Financial's 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 E-L Financial revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for E-L Financial with six simple checks will allow you to discover any risks that could be an issue.

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.

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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.