Fewer Investors Than Expected Jumping On Power Corporation of Canada (TSE:POW)

With a median price-to-earnings (or "P/E") ratio of close to 14x in Canada, you could be forgiven for feeling indifferent about Power Corporation of Canada's (TSE:POW) P/E ratio of 14.9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Power Corporation of Canada has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Power Corporation of Canada

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Power Corporation of Canada.

How Is Power Corporation of Canada's Growth Trending?

The only time you'd be comfortable seeing a P/E like Power Corporation of Canada's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 26% each year during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 9.3% per year growth forecast for the broader market.

With this information, we find it interesting that Power Corporation of Canada is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

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.

Our examination of Power Corporation of Canada's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Power Corporation of Canada, and understanding these should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.