Next 15 Group plc (LON:NFG) Shares Fly 25% But Investors Aren't Buying For Growth

Next 15 Group plc (LON:NFG) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 70% share price decline over the last year.

Even after such a large jump in price, Next 15 Group may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.4x, since almost half of all companies in the United Kingdom have P/E ratios greater than 17x and even P/E's higher than 28x are not unusual. 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.

We've discovered 3 warning signs about Next 15 Group. View them for free.

Next 15 Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

View our latest analysis for Next 15 Group

Want the full picture on analyst estimates for the company? Then our free report on Next 15 Group will help you uncover what's on the horizon.

How Is Next 15 Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Next 15 Group's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 5.1% per annum over the next three years. That's shaping up to be materially lower than the 15% each year growth forecast for the broader market.

With this information, we can see why Next 15 Group 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.

The Key Takeaway

Shares in Next 15 Group are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

As we suspected, our examination of Next 15 Group'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. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Next 15 Group, and understanding these should be part of your investment process.

If you're unsure about the strength of Next 15 Group'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.