Supreme Plc (LON:SUP) Surges 30% Yet Its Low P/E Is No Reason For Excitement

Despite an already strong run, Supreme Plc (LON:SUP) shares have been powering on, with a gain of 30% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 51% in the last year.

Although its price has surged higher, given about half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may still consider Supreme as an attractive investment with its 8.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Supreme certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Supreme

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

Is There Any Growth For Supreme?

In order to justify its P/E ratio, Supreme would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 86% last year. The strong recent performance means it was also able to grow EPS by 117% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 8.4% during the coming year according to the dual analysts following the company. Meanwhile, the broader market is forecast to expand by 18%, which paints a poor picture.

In light of this, it's understandable that Supreme's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Supreme's P/E

Supreme's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Supreme maintains its low P/E on the weakness of its forecast for sliding earnings, 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. 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 2 warning signs with Supreme (at least 1 which can't be ignored), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.

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