Heritage Global Inc.'s (NASDAQ:HGBL) Shares Not Telling The Full Story

With a price-to-earnings (or "P/E") ratio of 15.4x Heritage Global Inc. (NASDAQ:HGBL) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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While the market has experienced earnings growth lately, Heritage Global's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Heritage Global

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

Is There Any Growth For Heritage Global?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 69%. As a result, earnings from three years ago have also fallen 51% 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 39% per annum as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.

With this information, we find it odd that Heritage Global is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Heritage Global's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 3 warning signs for Heritage Global (1 is a bit concerning!) that we have uncovered.

If you're unsure about the strength of Heritage Global's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.