Fairfax Financial Holdings Limited's (TSE:FFH) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 5.8x Fairfax Financial Holdings Limited (TSE:FFH) may be sending very bullish signals at the moment, given that almost half of all companies in Canada have P/E ratios greater than 15x and even P/E's higher than 29x 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.

Fairfax Financial Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 Fairfax Financial Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fairfax Financial Holdings.

How Is Fairfax Financial Holdings' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Fairfax Financial Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. Pleasingly, EPS has also lifted 2,762% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 32% per annum during the coming three years according to the five analysts following the company. Meanwhile, the broader market is forecast to expand by 9.4% per year, which paints a poor picture.

In light of this, it's understandable that Fairfax Financial Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. 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 Fairfax Financial Holdings' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Fairfax Financial Holdings maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Fairfax Financial Holdings (1 makes us a bit uncomfortable!) that we have uncovered.

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.