Market Might Still Lack Some Conviction On World Acceptance Corporation (NASDAQ:WRLD) Even After 25% Share Price Boost

World Acceptance Corporation (NASDAQ:WRLD) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The annual gain comes to 120% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may still consider World Acceptance as an attractive investment with its 14.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, World Acceptance has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for World Acceptance

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Is There Any Growth For World Acceptance?

World Acceptance'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.

Retrospectively, the last year delivered an exceptional 246% gain to the company's bottom line. Pleasingly, EPS has also lifted 48% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 26% per annum as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader market.

With this information, we find it odd that World Acceptance is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift World Acceptance's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of World Acceptance'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. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware World Acceptance is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on World Acceptance, 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.