Lacklustre Performance Is Driving Heimar hf.'s (ICE:HEIMAR) Low P/E

Heimar hf.'s (ICE:HEIMAR) price-to-earnings (or "P/E") ratio of 13.1x might make it look like a buy right now compared to the market in Iceland, where around half of the companies have P/E ratios above 19x and even P/E's above 29x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Heimar hf certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Heimar hf

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Heimar hf's earnings, revenue and cash flow.

How Is Heimar hf's Growth Trending?

Heimar hf's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 117% last year. Still, incredibly EPS has fallen 18% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 19% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Heimar hf is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

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 Heimar hf maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Heimar hf (of which 1 is potentially serious!) you should know about.

If these risks are making you reconsider your opinion on Heimar hf, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.