When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may consider J. Smart & Co. (Contractors) PLC (LON:SMJ) as a highly attractive investment with its 8x 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.
The earnings growth achieved at J. Smart (Contractors) over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is J. Smart (Contractors)'s Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as J. Smart (Contractors)'s is when the company's growth is on track to lag the market decidedly.
If we review the last year of earnings growth, the company posted a worthy increase of 14%. This was backed up an excellent period prior to see EPS up by 78% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
In contrast to the company, the rest of the market is expected to decline by 5.0% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.
In light of this, it's quite peculiar that J. Smart (Contractors)'s P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
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 J. Smart (Contractors) currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.
Having said that, be aware J. Smart (Contractors) is showing 3 warning signs in our investment analysis, you should know about.
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 P/E ratio below 20x).
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This article by Simply Wall St is general in nature. 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.
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