Cautious Investors Not Rewarding The Kroger Co.'s (NYSE:KR) Performance Completely

There wouldn't be many who think The Kroger Co.'s (NYSE:KR) price-to-earnings (or "P/E") ratio of 18.8x is worth a mention when the median P/E in the United States is similar at about 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Kroger's negative earnings growth of late has neither been better nor worse than most other companies. The P/E is probably moderate because investors think the company's earnings trend will continue to follow the rest of the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. At the very least, you'd be hoping that earnings don't accelerate downwards if your plan is to pick up some stock while it's not in favour.

Check out our latest analysis for Kroger

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Is There Some Growth For Kroger?

There's an inherent assumption that a company should be matching the market for P/E ratios like Kroger's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.3%. As a result, earnings from three years ago have also fallen 12% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 9.8% per year, the company is positioned for a stronger earnings result.

In light of this, it's curious that Kroger's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

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.

We've established that Kroger currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

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

You might be able to find a better investment than Kroger. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.