With a price-to-earnings (or "P/E") ratio of 18x SFS Group AG (VTX:SFSN) may be sending bullish signals at the moment, given that almost half of all companies in Switzerland have P/E ratios greater than 23x and even P/E's higher than 34x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
While the market has experienced earnings growth lately, SFS Group's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for SFS Group
How Is SFS Group's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like SFS Group's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 39% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 6.6% per year during the coming three years according to the six analysts following the company. With the market predicted to deliver 11% growth per year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that SFS 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 Bottom Line On SFS Group's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of SFS Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.
You should always think about risks. Case in point, we've spotted 1 warning sign for SFS Group you should be aware of.
If you're unsure about the strength of SFS Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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 SWX:SFSN
SFS Group
Supplies precision components and assemblies, mechanical fastening systems, tools, and procurement solutions in Switzerland and internationally.
Excellent balance sheet established dividend payer.
