Stella-Jones Inc.'s (TSE:SJ) Popularity With Investors Is Clear

With a median price-to-earnings (or "P/E") ratio of close to 13x in Canada, you could be forgiven for feeling indifferent about Stella-Jones Inc.'s (TSE:SJ) P/E ratio of 14.4x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Stella-Jones has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Stella-Jones

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

Is There Some Growth For Stella-Jones?

There's an inherent assumption that a company should be matching the market for P/E ratios like Stella-Jones' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 78% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 7.8% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.5% each year, which is not materially different.

With this information, we can see why Stella-Jones is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Stella-Jones' 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.

As we suspected, our examination of Stella-Jones' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

You need to take note of risks, for example - Stella-Jones has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.