The Rank Group Plc's (LON:RNK) Subdued P/E Might Signal An Opportunity

There wouldn't be many who think The Rank Group Plc's (LON:RNK) price-to-earnings (or "P/E") ratio of 14.7x is worth a mention when the median P/E in the United Kingdom is similar at about 16x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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With earnings growth that's superior to most other companies of late, Rank Group has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

Check out our latest analysis for Rank Group

Keen to find out how analysts think Rank 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 P/E?

In order to justify its P/E ratio, Rank Group would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 263%. Still, incredibly EPS has fallen 21% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 16% per year growth forecast for the broader market.

With this information, we find it interesting that Rank Group is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

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 Rank Group currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Rank Group with six simple checks on some of these key factors.

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 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.