There's No Escaping Hiscox Ltd's (LON:HSX) Muted Earnings

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 16x, you may consider Hiscox Ltd (LON:HSX) as an attractive investment with its 8.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Hiscox could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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.

Check out our latest analysis for Hiscox

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

Does Growth Match The Low P/E?

Hiscox's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. Even so, admirably EPS has lifted 234% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 3.2% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 16% per year, which is noticeably more attractive.

With this information, we can see why Hiscox 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 Hiscox's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hiscox maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hiscox (1 doesn't sit too well with us) you should be aware of.

If you're unsure about the strength of Hiscox'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.