Take Care Before Diving Into The Deep End On Kingfisher plc (LON:KGF)

With a median price-to-earnings (or "P/E") ratio of close to 15x in the United Kingdom, you could be forgiven for feeling indifferent about Kingfisher plc's (LON:KGF) P/E ratio of 13.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Kingfisher has been very sluggish. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

See our latest analysis for Kingfisher

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

What Are Growth Metrics Telling Us About The P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 46%. Still, the latest three year period has seen an excellent 145% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 15% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 12% per year, which is noticeably less attractive.

With this information, we find it interesting that Kingfisher is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

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 Kingfisher currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 3 warning signs for Kingfisher you should be aware of.

You might be able to find a better investment than Kingfisher. 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).

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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.