Investors Aren't Buying Mitie Group plc's (LON:MTO) Earnings

With a price-to-earnings (or "P/E") ratio of 13.5x Mitie Group plc (LON:MTO) may be sending bullish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios greater than 26x and even P/E's higher than 51x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings that are retreating more than the market's of late, Mitie Group has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Is There Any Growth For Mitie Group?

Mitie Group's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

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 34%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 14% per year as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 21% each year, which is noticeably more attractive.

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

What We Can Learn From Mitie Group's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Mitie Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these 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 4 warning signs with Mitie Group (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of Mitie 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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