Asbestos Corporation Limited's (CVE:AB.H) Share Price Boosted 41% But Its Business Prospects Need A Lift Too

The Asbestos Corporation Limited (CVE:AB.H) share price has done very well over the last month, posting an excellent gain of 41%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.0% over the last year.

Although its price has surged higher, given about half the companies in Canada have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Asbestos as a highly attractive investment with its 4.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

For instance, Asbestos' receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.

Check out our latest analysis for Asbestos

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

Does Growth Match The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 71%. Regardless, EPS has managed to lift by a handy 6.8% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Asbestos' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Asbestos' P/E

Asbestos' recent share price jump still sees its P/E sitting firmly flat on the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Asbestos maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 6 warning signs with Asbestos (at least 4 which make us uncomfortable), and understanding them should be part of your investment process.

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.