The Market Doesn't Like What It Sees From Imperial Brands PLC's (LON:IMB) Earnings Yet

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 15x, you may consider Imperial Brands PLC (LON:IMB) as a highly attractive investment with its 7.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Imperial Brands certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Imperial Brands

Want the full picture on analyst estimates for the company? Then our free report on Imperial Brands will help you uncover what's on the horizon.

Is There Any Growth For Imperial Brands?

Imperial Brands' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. The latest three year period has also seen an excellent 68% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 5.3% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Imperial Brands is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Imperial Brands' 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 Imperial Brands 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 2 warning signs with Imperial Brands, and understanding these should be part of your investment process.

You might be able to find a better investment than Imperial Brands. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.