A Piece Of The Puzzle Missing From Leonardo DRS, Inc.'s (NASDAQ:DRS) Share Price

Leonardo DRS, Inc.'s (NASDAQ:DRS) price-to-earnings (or "P/E") ratio of 8.5x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 15x 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.

Leonardo DRS 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 Leonardo DRS

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Is There Any Growth For Leonardo DRS?

Leonardo DRS' 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 178% last year. The strong recent performance means it was also able to grow EPS by 196% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 7.0% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Leonardo DRS' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Leonardo DRS' P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Leonardo DRS revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 2 warning signs for Leonardo DRS that you need to take into consideration.

If these risks are making you reconsider your opinion on Leonardo DRS, 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.