East Side Games Group Inc.'s (TSE:EAGR) Prospects Need A Boost To Lift Shares

East Side Games Group Inc.'s (TSE:EAGR) price-to-earnings (or "P/E") ratio of 6.8x might make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 11x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

East Side Games Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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.

Our analysis indicates that EAGR is potentially undervalued!

Keen to find out how analysts think East Side Games Group's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like East Side Games Group's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 233% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 98% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 16% each year as estimated by the six analysts watching the company. Meanwhile, the broader market is forecast to expand by 5.3% each year, which paints a poor picture.

With this information, we are not surprised that East Side Games Group is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that East Side Games Group 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for East Side Games Group (1 can't be ignored) you should be aware of.

If these risks are making you reconsider your opinion on East Side Games 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.