Benign Growth For Yellow Cake plc (LON:YCA) Underpins Its Share Price

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may consider Yellow Cake plc (LON:YCA) as a highly attractive investment with its 7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Yellow Cake hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Yellow Cake's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 68%. As a result, earnings from three years ago have also fallen 45% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 18% per annum during the coming three years according to the dual analysts following the company. With the market predicted to deliver 14% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Yellow Cake is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Yellow Cake's P/E?

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 Yellow Cake maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Yellow Cake with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Yellow Cake, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.