Air Canada (TSE:AC) Held Back By Insufficient Growth Even After Shares Climb 32%

Despite an already strong run, Air Canada (TSE:AC) shares have been powering on, with a gain of 32% in the last thirty days. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, given about half the companies in Canada have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Air Canada as a highly attractive investment with its 3x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Air Canada has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.

See our latest analysis for Air Canada

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

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Air Canada's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. 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 slump, contracting by 26% each year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 9.0% each year, which paints a poor picture.

With this information, we are not surprised that Air Canada is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Air Canada's P/E?

Shares in Air Canada are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Air Canada 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.

Having said that, be aware Air Canada is showing 2 warning signs in our investment analysis, and 1 of those is significant.

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.