The Market Doesn't Like What It Sees From Flow Traders Ltd.'s (AMS:FLOW) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 5.9x Flow Traders Ltd. (AMS:FLOW) may be sending very bullish signals at the moment, given that almost half of all companies in the Netherlands have P/E ratios greater than 18x and even P/E's higher than 27x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Flow Traders 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Flow Traders

Keen to find out how analysts think Flow Traders' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Flow Traders?

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

Retrospectively, the last year delivered an exceptional 163% gain to the company's bottom line. Pleasingly, EPS has also lifted 113% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 5.5% each year over the next three years. That's not great when the rest of the market is expected to grow by 15% each year.

With this information, we are not surprised that Flow Traders is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Flow Traders' 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.

We've established that Flow Traders 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Flow Traders you should know about.

If these risks are making you reconsider your opinion on Flow Traders, 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.