Fewer Investors Than Expected Jumping On Hargreaves Services Plc (LON:HSP)

It's not a stretch to say that Hargreaves Services Plc's (LON:HSP) price-to-earnings (or "P/E") ratio of 16.3x right now seems quite "middle-of-the-road" compared to the market in the United Kingdom, where the median P/E ratio is around 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Hargreaves Services could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Hargreaves Services

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hargreaves Services.

Does Growth Match The P/E?

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

Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 27% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.

In light of this, it's curious that Hargreaves Services' P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From Hargreaves Services' 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 Hargreaves Services 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Hargreaves Services that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.