With a price-to-earnings (or “P/E”) ratio of 26.2x Hagar hf (ICE:HAGA) may be sending bearish signals at the moment, given that almost half of all companies in Iceland have P/E ratios under 17x and even P/E’s lower than 12x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
For example, consider that Hagar hf’s financial performance has been poor lately as it’s earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
View our latest analysis for Hagar hf
Does Growth Match The High P/E?
The only time you’d be truly comfortable seeing a P/E as high as Hagar hf’s is when the company’s growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 1.4% decrease to the company’s bottom line. As a result, earnings from three years ago have also fallen 43% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 6.6% over the next year, which really puts the company’s recent medium-term earnings decline into perspective.
In light of this, it’s alarming that Hagar hf’s P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company’s business prospects. There’s a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Hagar hf revealed its shrinking earnings over the medium-term aren’t impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 2 warning signs for Hagar hf that you need to take into consideration.
Of course, you might also be able to find a better stock than Hagar hf. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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This article by Simply Wall St is general in nature. 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.
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