When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 16x, you may consider ADF Group Inc. (TSE:DRX) as a highly attractive investment with its 5.2x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for ADF Group as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for ADF Group
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, ADF Group would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 153% last year. The strong recent performance means it was also able to grow EPS by 447% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 15% as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.
In light of this, it's understandable that ADF Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that ADF Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for ADF Group with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on ADF Group, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
About TSX:DRX
ADF Group
Engages in the design and engineering of connections including industrial coatings in Canada and the United States.
Outstanding track record with flawless balance sheet.
