Lookers plc's (LON:LOOK) Price Is Right But Growth Is Lacking

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 14x, you may consider Lookers plc (LON:LOOK) as a highly attractive investment with its 4.3x 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.

Recent times haven't been advantageous for Lookers as its earnings have been rising slower than most other companies. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

View our latest analysis for Lookers

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

How Is Lookers' Growth Trending?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.7% last year. Pleasingly, EPS has also lifted 487% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 27% as estimated by the five analysts watching the company. That's not great when the rest of the market is expected to grow by 8.3%.

In light of this, it's understandable that Lookers' 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.

What We Can Learn From Lookers' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Lookers' analyst forecasts revealed that its outlook for shrinking earnings 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. 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 Lookers (1 doesn't sit too well with us) you should be aware of.

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 P/E ratio below 20x).

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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.