Trainline plc's (LON:TRN) price-to-earnings (or "P/E") ratio of 13.7x might make it look like a buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 17x and even P/E's above 29x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Recent times have been advantageous for Trainline as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Trainline
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Trainline's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. Pleasingly, EPS has also lifted 889% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 9.5% per annum over the next three years. With the market predicted to deliver 17% growth per year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that Trainline'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.
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.
As we suspected, our examination of Trainline'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Trainline with six simple checks on some of these key factors.
If you're unsure about the strength of Trainline'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.